CHANCEMORE LTD v. YEE ON ENTERPRISES LTD

LDCS 17000/2015

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO. LDCS 17000 OF 2015

________________________

REASONS FOR DECISION

________________________

1.  On 31 July 2017, I delivered the judgment (“the Judgment”) on an application for compulsory sale of all the undivided shares of and in the Section Q and Section R of Inland Lot No 730 (collectively “the Lot”) for the purposes of redevelopment pursuant to section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”).

2.  More particularly in the Judgment, I granted an order for sale of all the undivided shares in the Lot be made by auction pursuant to section 5(1)(a) of the Ordinance and inter alia, ordered Mr Ho Hing Choi Peter (何慶材) and Mr Yip Tung Sang (葉冬生), nominated by the applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustee under the Ordinance in relation to the Lot.

3.  On 14 September 2017, the applicant applied by summons (“the 1st Summons”) for the following orders:

(1) Paragraph 5 of the Judgment which appointed the Trustees be amended to appoint Mr Cheung Chi Yu Archie and Ms Yau Yuen Mei Connie as new trustees (“the New Trustees”) in substitution and the New Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Cheung & Co dated 12 September 2017;

(2) Messrs Edward C T Wong & Co be appointed as the solicitors for the New Trustees (“the New Trustees’ Solicitors”) to assist the New Trustees in discharging their duties imposed by the Ordinance in substitution for Messrs Michael Cheuk, Wong & Kee (“MCWK”) appointed under paragraph 6 of the Judgment and the New Trustees’ Solicitors be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Cheung & Co dated 12 September 2017.

4.  On 20 September 2017, the respondent applied by summons (“the 2nd Summons”) for a similar but different order comprising as follows:

(1) Mr Anthony W K Chow and Ms Anna S H Chow (“Messrs Chow”) of Guantao & Chow, Solicitors and Notaries be appointed trustees in substitution for the Trustees to discharge the duties imposed on under the Ordinance in relation to the Lot and Messrs Chow be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Guantao & Chow, Solicitors and Notaries dated 19 September 2017;

(2) Reed Smith Richards Butler (“RSRB”) be appointed as the solicitors in substitution for MCWK to assist Messrs Chow to assist in discharging their duties imposed by the Ordinance and RSRB be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from RSRB dated 12 September 2017;

(3) The Trustees do disclose to the respondent and Messrs Chow within 7 days from the date of the Order to be made herein all documents and correspondence in their possession, custody or power in relation to any and all proposals received by them from one or more parties proposing to act as auctioneer for the sale of all the Lot by public auction pursuant to the Judgment, including but not limited to those from Savills Valuations and Professional Services Limited (“Savills”);

(4) C S Auctioneers Limited (“C S Auctioneers”) be appointed the new auctioneer in substitution for Savills;

(5) The sale of the Lot by public auction by Savills fixed for 29 September 2017 (“the Auction”) be cancelled;

(6) The Particulars and Conditions of Sale of the Lot be amended and submitted to the Tribunal for approval;

(7) The points of law arising from the applicant’s Summons filed on 14 September 2017 and this Summons be determined by the President or a presiding officer on a date to be fixed pursuant to section 9(6) of the Lands Tribunal Ordinance.

5.  I granted an order in terms of the 1st Summons but the respondent’s Summons (ie the 2nd Summons) was dismissed on the same date. I now hand down the reasons.

Background to the two Summons

6.  The background to the two Summons mentioned above can be discerned from the Affirmation of Kwan Long Yee Corrina, the partner of Messrs Ip, Kwan & Co (“IKC”) attached to the 2nd Summons.

7.  As per the Affirmation of Ko Ping Yin, the Property Manager (Project Management) of the applicant attached to the 1st Summons, the Trustees tendered their resignation following an allegation by IKC for the respondent that the Trustees were in a conflict of interest situation in that Messrs Mayer Brown JSM (“JSM” in which firm of solicitors the Trustees are partners) acted for Eminence Enterprise Limited, a listed company to which the applicant is a wholly owned subsidiary.

Respondent’s Submission

8.  Mark Strachan SC together with Jeffrey Chau (“Messrs Strachan and Chan”) elaborated the respondent’s position in their submission dated 22 September 2017.

Unseemly Haste in Pushing Forward the Auction

9.  According to Messrs Strachan and Chan, there was an unexplained delay on the part of the Trustees in convening the first meeting with the applicant and the respondent. Whereas the meeting was held on 25 August 2017 albeit that the Judgment had been delivered on 31 July 2017, the respondent was given the agenda for the hearing only late on 22 August 2017 whereby the Trustees pushed forward the Auction with unseemly haste with a view to completing the sale by 30 October 2017 on the excuse that section 5(4)(a) of the Ordinance requires that the Lot be “sold’ within the 3 months immediately following the date of the order.

10.  Messrs Strachan and Chan submit the assertion by MCWK that the word “sold” refers to completion of sale is incorrect because the plain wording in the Ordinance means “sold by auction” instead. Messrs Strachan and Chan plead §9 in Pacific Crown Enterprises Limited v Topbase International Limited, LDCS 32000/2011 (unreported, dated 13 December 2012) and §14 of the Minutes of the meeting of the Bills Committee on the Ordinance in support.

11.  Further, according to Clause 8(a) of the Particulars and Conditions of Sale approved by the Tribunal, the Lot is “sold” when it is sold in the Auction, that is “immediately on the fall of the hammer” when the Memorandum of Agreement is signed.

12.  As a result of the above misconception, Messrs Strachan and Chan submit, the Trustees imposed a speedy timetable which, among other things, did not afford the respondent sufficient time to consider and deal with various issues, including nominating 3 auctioneers by 28 August 2017, which had been proposed by the Trustees and which the respondent had wanted to do.

Appointing Savills as Auctioneer

13.  As a result of the time constraint, the respondent only managed to nominate one auctioneer, C S Auctioneers.

14.  In spite of the above, the Trustees appointed Savills as the auctioneer but Savills merely proposed to do the statutory minimum under Schedule 2 of the Ordinance, ie

“The public shall be given notice of the auction by means of an advertisement—

(a) published—

(i) in not less than 1 Chinese language newspaper (and in the Chinese language), and in not less than 1 English language newspaper (and in the English language), circulating generally in Hong Kong; and

(ii) not less than once in each of the 3 weeks immediately preceding the date on which the auction is to be held; and …”

15.  In comparison, the marketing and promoting proposals of C S Auctioneers were much more aggressive.

16.  IKC had requested MCWK to provide the respondent with all the auctioneers’ proposals which had been received by the Trustees of no avail. The respondent alleges that the Trustees had breached its fiduciary duties owed to the respondent, particularly when the respondent finds that Savills was recently engaged by Eminence as one of the 2 entities to handle the redevelopment value and the existing use value of the Lot for the purpose of Eminence’s “possible very substantial acquisition’ of the Lot. The other entity is Knight Frank Petty Limited (“Knight Frank”) which was initially proposed by the applicant as auctioneer but whose Mr Alnwick Chan had acted as the applicant’s expert witness in the present case.

Discovery of the Trustees’ Conflict of interest

17.  In JSM’s letter in respect of the Trusteed’ appointment, JSM claimed that “(they) are not aware of any conflict of interest in [Mr Ho and Mr Yip’s] appointment” as the Trustees.

18.  On or about 5 September 2017, IKC discovered that Eminence’s public announcement on 22 August 2017 stated that:

“…. The auctioneer will be selected by the trustees. Each of the trustees is a partner in a law firm which provides legal advice to [Eminence] but is otherwise a third party independent of [Eminence] and connected persons (as defined in the Listing Rules0 of [Eminence], its subsidiaries and their respective associates (as defined in the Listing Rules) ….”

19.  In a letter dated 6 September 2017, MCWK stated that:

“we are instructed that [Eminence] is not a client of [JSM]. To the contrary, [JSM] currently has a matter in which it is acting adverse to Eminence. To be clear, [JSM] has from time to time been instructed on matters on behalf of companies which, according to the information provided to then, are subsidiaries of, or relates to, Eminence (including the applicant, by whom [JSM] had previously been instructed, which matter has long concluded), all of which are unrelated to the above compulsory sale proceedings.”

20.  While IKC contested that this response from MCWK is plainly inconsistent with the said announcement, MCWK, in its letter dated 8 September 2017, refused to clarify the inconsistency on the basis that it was ‘otiose” to do so as the Trustees had tendered their resignation on 6 September 2017 “in order to ensure the expeditious carrying out of the terms of the Tribunal’s Order ….”

21.  The respondent has also recently discovered that JSM has handled financing matters for the applicant, Eminence and its subsidiaries, including the debenture and mortgage in 2016 in respect of the Lot.

22.  By reason of the foregoing, Messrs Strachan and Chan submit that the Trustees have a serious conflict of interest.

Proceeding with the Auction Despite the Trustees’ Resignation

23.  The respondent complains that despite all the aforesaid, the Trustees and MCWK or more probably the applicant, still insisted on proceeding with the Auction on 29 September 2017 with the New Trustees simply adopting the work done by the Trustees, MCWK and Savills.

24.  Firstly, the respondent regards the appointment of the New Trustees and the New Trustees’ Solicitors just a fig leaf with no substantive effect whatsoever. This is highly improper, particularly in light of (1) that the Trustees were acting in conflict of interest and (2) the questionable conduct of the Trustees and MCWK in handling the Auction, including the appointment of Savills as the auctioneer.

25.  Also, irrespective of the above, and on the applicant’s own case:

(1) The Notices of Auction, which have already been published in the newspapers, contain what has now become incorrect information as to the identity, address, contact person, etc of the Vendor’s Solicitors (MCWK) and (unless Savills remains as auctioneer) the identity, address, contact person, etc of the auctioneer (Savills);

(2) The Particulars and Conditions of Sale, which have been approved by the Tribunal and which the Notices of Auction have already invited the bidders to obtain, contain what has now become incorrect information as to the identity and address of the Trustees, the identity, address, etc of the Vendor’s Solicitors (MCWK) and (unless Savills remains as auctioneer) the identity, address, contact person, etc of the auctioneer (Savills);

26.  In consequence, the Notices of Auction will have to be amended and republished and the Particulars and Conditions of Sale will have to be amended and re-approved. The public will thereby be given, as is necessary, notice of the change of trustees, the change of trustees’ solicitors and (if any) the change of auctioneer.

27.  The respondent submits that the applicant’s suggestion of having MCWK and Ms Kitty Lam of that firm to continue to provide certain services after MCWK’s removal cannot work.

28.  Furthermore, the Notices of Auction have informed the public that persons intending to make bids at the Auction need to have registered with MCWK and to have left with MCWK a cashier order or a certified cheque for the sum of HK$10 million made payable to MCWK. Insofar as any such persons have registered with MCWK and/or have made out cheques to the MCWK (or will in due course do so), they will have registered with, and will have made cheques out to, the wrong solicitors.

Points of Law for Determination of the President/Presiding Officer

29.  Messrs Strachan and Chan submit that the following points of law arising in this matter should be determined by the President or a presiding officer pursuant to section 9(6) of the Lands Tribunal Ordinance:

(1) Whether the phrase “when the lot the subject of an order for sale is not sold … within 3 months” in section 5(4) of the Ordinance refers to the auction/ signing the Memorandum of Agreement having to take place within 3 months of the Order, or whether it refers to the completion of the sale having to take place within 3 months (“Question 1”);

(2) Whether the minority shareholder has the power to nominate new trustees under section 4(10) of the Ordinance (“Question 2”);

(3) Whether the Trustees owe fiduciary duties to the majority and minority owners of the Lot (“Question 3”);

(4) If Question 3 is answered in the affirmative;

(a) whether the Trustees were acting in conflict of interest (“Question 4”);

(b) whether the Trustees are required to disclose the auctioneers’ proposals to the respondent (“Question5”).

30.  The respondent submits that, the hearing of the 1^st Summons and the 2^nd Summons should be adjourned for the points of law to be argued. And because of the foregoing, the Auction cannot go ahead on 29 September 2017.

The Respondent’s Proposed Trustees, Solicitors and Auctioneers

31.  The respondent submits that its proposed trustees, solicitors and auctioneers are preferable to the applicant’s.

32.  In this regard, Messrs Strachan and Chan submit that a minority owner is entitled to nominate the new trustees in substitution of the Trustees pursuant to section 4(10) of the Ordinance. As the applicant has failed to reveal its connection with both the Trustees and Savills, it is submitted that this is a situation in which the Tribunal should appoint the respondent’s proposed new trustees as opposed to the candidates proposed by the applicant, unless the Tribunal comes to a conclusion that the respondent’s proposed candidates are unqualified to do so.

33.  The respondent further submits that even if the Tribunal were to appoint the new trustees proposed by the applicant, the Tribunal should still go on to decide whether the respondent’s proposed solicitors and auctioneers should be appointed.

The Trustees’ Submission

34.  Also on 22 September 2017, MCWK filed submissions prepared by Jin Pao (“Mr Pao”) on behalf of the Trustees who have become the Interest Parties in this hearing.

35.  Firstly, on the issue of substitution:

(1) It is common ground between all parties that there should be a substitution of the Trustees, and their solicitors, with new trustees and solicitors;

(2) The Trustees take a neutral position as to the identity of the new trustees and their solicitors;

(3) Subject to the question of identity of the new trustees and solicitors, there should be no difficulty in amending the order for sale under section 4(10) of the Ordinance to provide for the substitution of the Trustees;

(4) With a view to facilitating the proper conduct of the Auction, the current solicitors of the Trustees, ie MCWK are prepared to continue to act on behalf of the new trustees for a short period (say, one week) after 29 September 2017, before their appointment is transferred to the new solicitors.

36.  Secondly, on the issue of disclosure, without prejudice to the Trustees’ position that there is no legal obligation to make such disclosure, and to assist the Tribunal, the Trustees have now disclosed all auctioneer proposal received by them. Therefore, this is no longer a live issue which needs to concern the Tribunal.

37.  Thirdly, on the issue of the auctioneer:

(1) On 1 September 2017, after receiving nominations from the parties, the Trustees appointed Savills as the auctioneer for the public auction to be conducted for the sale of the Lot;

(2) Savills was not nominated by either the majority or minority owners and was independently appointed by the Trustees.

(3) The commission proposed by C S Auctioneers, nominated by the respondent, was 1% of the transaction price, with 0.5% payable by each of the vender and purchaser. This comes to a total of HK$4,410,000 even based on the minimum reserve price determined by the Tribunal. This commission would be payable in addition to an auction fee of HK$30,000. Therefore, the estimated total fees involved would become HK$4,440,000.

(4) In contrast, Savills proposed to charge a flat fee of HK$150,000 exclusive of all out-of-pocket marketing costs, which were estimated at HK$67,000. Therefore, the estimated total expenditure for Savills is approximately HK$217,000.

(5) Unlike C S Auctioneers, Savills did not propose to charge any commission. That is why the services of C S Auctioneers were many times more expensive than Savills and this was one of the reasons why it was not chosen by the Trustees. In fact, their proposal to charge a commission on the transaction price highlights their lack of experience in this field of work.

(6) The proposal by C S Auctioneers does not give any particulars of relevant substantial past experience in conducting public auction arising from compulsory sale of land cases. This is unlike the extensive experience, supported by clear particulars, stated by Savills in their proposal to the Trustees.

(7) There is simply no evidence to suggest that Savills is unable to fairly, properly and independently conduct its role as auctioneer in the Auction on 29 September 2017.

(8) That Savills signed off on an Annex to a Circular issued by Eminence dated 12 September 2017 regarding the valuation of the Lot does not assist the respondent. This took place after the granting of the compulsory sale order by the Lands Tribunal and their appointment as auctioneer by the Trustees on 1 September 2017, and the Trustees could not have been aware of this at that time. In any event, it is unclear how their involvement in the valuation of the Lot for the purpose as described in the Circular would affect their ability to conduct the Auction in any way.

38.  Fourth, on the issue of the Auction:

(1) The Trustees point out that there has been, and will be, proper compliance with section 5(1)(a) and Schedule 2 to the Ordinance as to the notice of the Auction by way of a number of newspaper advertisements.

(2) The first 2 sets of advertisements were published on 8 and 15 September 2017, with 2 further sets of advertisements due to be published on 22 and 28 September 2017.

(3) The Trustees independently decided to publish these advertisements in Sing Tao Daily and SCMP, newspapers of wide circulation in Hong Kong.

(4) There is no suggestion by the respondent that any of the statutory requirements in the Ordinance have not been complied with in relation to the Auction.

(5) It is unfair to say that Savills simply placed a newspaper advertisement with no other marketing activities. The marketing activities proposed by Savills were reasonably extensive, including introducing potential purchasers drawn from their client list and mailing brochures to select clients; See Sections 6-7, Scope of Services in Savills’ Marketing Proposal.

(6) Bearing in mind the 3-month time limit for the Lot to be “sold” under section 5(4) of the Ordinance, it is important to proceed expeditiously to conduct the Auction in accordance with the statutory requirements under the Ordinance.

39.  Fifth, in relation to the allegations of the respondent:

(1) On 5 September 2017, the minority owner made certain allegations of “conflict of interest’ against the Trustees. The Trustees do not accept this. These allegations are disputed by the Trustees and were replied to in MCWK’s letter dated 6 September 2017;

(2) As stated in MCWK’s letter dated 7 September 2017:

“…. our clients anticipate and are concerned that further allegations of “conflict of interest”, against our clients, which are denied, may delay the auction process and would be detrimental to the interests of the majority and minority owners. In the premises, our clients do hereby tender their resignation as trustees.”

40.  Therefore, the Trustees do not accept that there was any conflict of interest on their part in their appointment by the Tribunal. The Trustees strongly object to any attempt to persuade the Tribunal to make a finding that there was any conflict of interest when there is incomplete evidence on the matter and it is not the responsibility of the Tribunal to make such a determination on this occasion.

41.  Any such allegation, which is of a serious nature and impacts on professional reputation, should not be made lightly and, in view of its severity, requires cogent and compelling evidence for it to be established. In the premises, it would be manifestly inappropriate to delve into the details of the allegation in question at this hearing particularly where the evidence on the matter is incomplete.

42.  All that the Tribunal needs to be satisfied of under section 4(10) of the Ordinance is that it would be “expedient” to make an order for substitution. In the present case, it is clear that all relevant parties (ie the majority and minority owners and Trustees) agree that there should be an order for substitution made by the Tribunal. In view of the agreement by the parties, it is unnecessary and undesirable to deal with the allegations of conflict of interest in these proceedings.

View of Tribunal

43.  I think it is trite and without dispute that the Trustees owe fiduciary duties to the majority and minority owners of the Lot. That is, I answer Question 3 posed by the respondent in the affirmative. Having said that however, I agree with and accept the submission made by Mr Pao that it is unnecessary and undesirable to deal with the allegations of conflict of interest (ie Question 4) in these proceedings whereas all relevant parties (ie the majority and minority owners and Trustees) agree that there should be an order for substitution made by the Tribunal.

44.  Similarly, I also agree with Mr Pao that whether the Trustees are required to disclose the auctioneers’ proposals to the respondent (ie Question 5) is no longer an issue[1]. All that the Tribunal needs to be satisfied of under section 4(10) of the Ordinance is that it would be “expedient” to make an order for substitution.

45.  I accept the other submissions by Mr Pao. I also agree with the Trustees that the word “sold” in section 5(4) should mean the date of completion of sale, not the date of auction because the section does provide for other means of sale and default on payment by the purchaser of the lot. A sale by public auction is not necessarily the only possible means of sale under the Ordinance. If the interpretation is otherwise, the Ordinance does not provide for a completion date and it is unreasonable to expect that the Ordinance would allow, for instance, a completion of sale many months after the auction taking place. I answer Question 1 against the respondent.§9 in Pacific Crown Enterprises Limited v Topbase International Limited, LDCS 32000/2011 is distinguished as the word “sold” in the Ordinance was not an issue there.

46.  Even if I am wrong, I consider the time frame as proposed for the Auction still acceptable.

47.  Further it is conceded by the respondent that the marketing proposed by Savills has satisfied the statutory requirement, minimum or otherwise as supplemented by Mr Pao as recited in §38 above. In any event, it serves everyone’s interest that the public auction is arranged as soon as possible after an Order for Sale or the market conditions pertaining to the determination of the reserve price under paragraph 2 of Schedule 2 to the Ordinance might have changed.

48.  I do not agree that the respondent has suffered any time constraint in, inter alia, nominating an auctioneer. By §5 of the Judgment, the respondent had nearly agreed everything on 27 May 2017 save for the question of the updated RDV to fix the reserve price. At the beginning of the trial on 4 July 2017, the respondent also changed tack – it no longer challenged the RDV assessed by the applicant’s expert as being too high. Instead, it said the RDV assessed was too low. Therefore, it should be reasonably expected that the Order for Sale by the Tribunal would be forthcoming and the respondent should have plenty of time in sorting out the appropriate auctioneer if it wished.

49.  All the more, while the applicant’s solicitors, Messrs Edward Ko & Company (“EKC”) was preparing the draft Particulars and Conditions for Sale, IKC had made comments on 8 August 2017. The two solicitors fell out and that may explain the “delay” alleged by the respondent. Eventually on 16 August 2017, the Tribunal approved the Particulars and Conditions for Sale acceding to the respondent’s request for HK$10 million for the amount of the initial deposit. That a public auction would take place soon should be reasonably expected.

50.  I do not find the appointment of Savills questionable as submitted by the respondent. I accept the explanations by Mr Pao in his submissions. In any event, the advantage of having a public auction as per section 5 of the Ordinance as opposed to other means of sale is that the auction is open and would be conducted in the sun. The Lot would go to the highest bidder. I do not consider having another auctioneer proposed by the respondent would achieve a better result, bearing in mind in particular the tracked experience of Savills in arranging auctions of similar kind.

51.  In this regard, I would also refer to §25 of Bond Star Development Limited v Capital Well Limited, LDCS 2000/2001 (unreported, dated 20 April 2006):

“We however agree with the Applicant that JLL is more suitable to be appointed as auctioneer for the sale than Mr. Liu or his firm. JLL is a large and reputable firm. We do not think that JLL would be biased or show favour to the Applicant just because they have worked for the Applicant or its associated companies before. After all, an auctioneer is just to conduct the auction in accordance with the rules and procedure of the auction. It is inconceivable that the Applicant would be able to influence the result of the auction through JLL when appointed as auctioneer.”

I consider the same comments applicable to Savills.

52.  I also agree with Mr Pao that charging an additional commission of 1% of the transaction price as proposed by C S Auctioneers appears introverted and inexperienced in arranging sale pursuant to an order for sale under the Ordinance. The sale by auction in the present case is a procedural step to implement the Order of the Tribunal[2]. Whereas the order was made pursuant to an application by the majority owner(s) of a lot, there has never been any abortive sale in the past in respect of order for sale under the Ordinance.

53.  Likewise, that Eminence, which wholly owns the applicant, will bid at the Auction is neither here nor there as both the majority owner and the minority owner are always potential and eager bidders.

54.  On the other hand, the additional commission would eat into the proceeds available for distribution to the majority owner and minority owner.

55.  At this juncture, I note that in the Affirmation of Kwan Long Yee Corrina attached to the 2^nd Summons, IKC raised the issue whether the applicant would agree to exchange the title deeds with the respondent before the title deeds and documents were made available for public inspection after the Notice of Auction was adverted. IKC even made a request for a Title Report from the conveyancing department of another law firm in support of the respondent’s argument that the Auction was arranged in haste. I agree that such a request was properly refused by EKC because under section 8(1) of the Ordinance,

“Where the lot the subject of an order for sale is sold—

(a) immediately upon the purchaser of the lot becoming the owner of the lot all the rights of any prior owner (including the prior owner’s assigns or personal representatives) in or over the lot or any part thereof shall absolutely cease except to the extent, if any, specified in the order; …”

I consider the request by IKC misconceived.

56.  Returning to section 4(10) of the Ordinance which provides for the authority of the Tribunal to amend an order for sale by appointing a new trustee or trustees either in substitution for or in addition to any existing trustee or trustees under the order for sale, not only a minority owner is entitled to make a nomination because:

“The Tribunal may make an order amending ….

(a) upon the application of the trustees under the order for sale or the majority owner or minority owner of the lot; and

(b) if the Tribunal is of the opinion that it is expedient to do so.”

 (underline added)

57.  The provision does not set the criteria that any of the proposed candidates are unqualified or otherwise before the Tribunal comes to its decision save that the Tribunal is of the opinion that it is expedient to do so. In any event, there is no complaint that the New Trustees or Messrs Chow are unqualified in anyway.

58.  As regards the consequential amendments to the Particulars and Conditions of Sale and the Notices of Auction etc, I do not consider such a technical matter would impede the proceeding of the Auction on 29 September 2017; last minute amendments to the Particulars and Conditions of Sale or the Notices of Auction in public auctions are not unprecedented or uncommon.

59.  I am also informed by the applicant that:

(1) no one has registered with MCWK as potential bidders,

(2) no certified cheque or cashier order has been deposited with them in relation to the auction and

(3) no party and/or firm of solicitors have attended their office to inspect the title deeds.

60.  In this event, even the suggestion of Ms Kitty Lam of MCWK to continue to provide certain services after MCWK’s removal is not necessary.

Order

61.  Having reviewed the above, I made an Order in terms of paragraphs 1 & 2 in the Summons by the applicant dated 14 September 2017. Subject to the decision of the New Trustees, the Auction may proceed on 29 September 2017 as scheduled subject to the Particulars and Conditions of Sale having been amended as regards the particulars of the New Trustees and the New Trustees’ Solicitors and the amendment should be advertised in the public at least 1 day prior to the Auction.

62.  The Summons sought by the respondent dated 20 September 2017 was refused.

Costs

63.  In the circumstances of this case, I believe it is fair and reasonable to make no order as to costs.  Unless any party applies for variation of the costs order within 14 days from the date hereof, such costs order nisi shall become absolute.

Intending Appeal on Points of Law

64.  When I gave the decisions earlier in the morning, Messrs Strachan and Chan instantly applied for a leave to appeal, stating for instance, points of law are involved.

65.  Under section 11AA (6) of the Lands Tribunal Ordinance provides that:

“Leave to appeal shall not be granted unless the Tribunal, the Court of Appeal or the registrar hearing the application for leave is satisfied that –

(a) the appeal has a reasonable prospect of success; or

(b) there is some other reason in the interests of justice why the appeal should be heard.”

66.  I agree with the submission by Mr Mok for the applicant and Mr Pao that I have made my decisions based on mainly the facts before me. In this regard, in accordance with section 11(1) of the Lands Tribunal Ordinance, the decision of the Tribunal is final. Therefore, the application for leave to appeal by the respondent is refused.

[1] See §36 above.

[2] §19 in LSY v HTF, FCMC 2978/2005 (unreported, dated 4 July 2013).

LDCS 17000/2015

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO. LDCS 17000 OF 2015

____________________________

____________________________

__________________

JUDGMENT

__________________

1.  This is an application for compulsory sale of all the undivided shares of and in the Section Q and Section R of Inland Lot No 730 (collectively “the Lot”) with the buildings erected thereon known as 11 & 13 Matheson Street respectively (collectively “the Building”) for the purposes of redevelopment pursuant to section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”). 

2.  The Building, comprising a pair of 6-storey buildings served by one common staircase abutting Matheson Street, was permitted to be occupied as per an occupation permit issued on 30 November 1965 as follows:

(1)   G/F: 2 shops for non-domestic use;

(2)   M/F (or Cockloft Floor): 2 stores for non-domestic use;

(3)   1/F: 1 office for non-domestic use; and

(4)   2/F-5/F: 2 tenements per floor for domestic use.

3.  Use and development of the Lot is governed by a Government Lease, the salient points of which are extracted as follows:

“…… which said message or tenement, messuages or tenements, shall be of the same rate of buildings, elevation, character and description, and shall front and range in an uniform manner with messuages or tenements in the same Street, and whole to be done to the satisfaction of the Surveyor of Her said Majesty, Her Heirs, Successors, or Assigns ……”

“…… shall not nor will, during the continuances of this demise, use exercise or follow, in or upon the said premises or any part thereof, the trade or business of a Brazier, Slaughterman, Soap-maker, Sugar-baker, Fellmonger, Melter of tallow, Oilman, Butcher, Distiller, Victualler, or Tavern-keeper, Blacksmith, Nightman, Scavenger, or any or either of them, or any other noisy noisome or offensive trade or business …..”

The Application

4.  There are a total of 14 units in the Building and each is allocated 1/14 undivided shares of the Lot. When the applicant commenced the present proceedings on 1 December 2015 (“the Application”), the applicant owned all the undivided shares in the Lot save and except for the 2 shares owned by the respondent in respect of G/F and Cockloft Floor of 11 Matheson Street (“the respondent’s units”). That is, the applicant has owned 85.71% of the undivided shares of the Lot.

Agreement Prior to Hearing

5.  On 27 May 2017, the applicant and the respondent have come to an agreement (“the Agreement”) that the apportionment ratio of the proceeds of sale of the Lot in respect of the respondent’s units is 42% in return for the following:

(1)   The respondent agrees to withdraw the contention that the existing use value (“EUV”) of the units in the Building was or is higher than the redevelopment value (“RDV”) of the Lot;

(2)   The respondent agrees to leave the applicant to prove its case for compulsory sale order in the hearing, save for the question of the updated RDV to fix the reserve price;

(3)   The respondent agrees not to cross-examine any of the witnesses, expert or factual, to be called by the applicant except on matters relevant to the assessment of the RDV and the respondent will not take any action which may hinder the applicant from obtaining the compulsory sale order in the action.

6.  The EUV of each unit in the Building has been agreed by the applicant and the respondent through their valuation experts in their joint statement dated 19 June 2017 as set out at Bundle III/F/1419 as follows:

(1)   The total EUV is agreed at $310,056,000; and

(2)   The EUV of the Respondent’s C/L is agreed at   32,560,000(10.50%) and G/F at $97,681,500(31.50%)

7.  In the present hearing, the applicant is represented by Mr Mok Yeuk Chi (“Mr Mok”) whereas the respondent is represented by Mr Walker Sham (“Mr Sham”).

8.  At the beginning of the hearing, Mr Sham further confirmed that the respondent would no longer rely on its valuation expert’s evidence as regards the assessment of RDV and the valuation expert would not be called.

Whether the Applicantisentitled to make the Application

9.  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.

10.  Section 3(2)(b) further provides that an application under subsection (1) may cover 2 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).

11.  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.

12.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage)) Notice was gazetted 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)”. 

13.  The occupation permit of the Building was issued on 30 November 1965 (ie 50 years before the date of the Application).  The Notice is applicable and the threshold percentage should be 80%.

14.  When the applicant commenced the present proceedings on 1 December 2015, it owned 85.71% of the undivided shares in the Lot, ie it owned on average more than 80.0% of the undivided shares in the Lot.  I agree therefore that the applicant was entitled to make the Application under section 3(2)(b) of the Ordinance.

Section 4(2)(a) -Whether redevelopment of the Lot is justifieddueto the “age” and/or “state or repair” ofthe Building

15.  Under section 4(1)(b) of the Ordinance, the Tribunal is to be satisfied that an order of sale should be made pursuant to the Application.  Section 4(2) of the Ordinance provides that there are basically 2 considerations, namely:

(i)   whether the redevelopment is justified due to age or state of repair of the existing development on the Lot; and

(ii)   whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lot where a minority owner’s whereabouts are known.

16.  The applicant has to satisfy this Tribunal that the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

17.  For the age and state of repair requirements, the applicant adduced the expert evidence of Mr Wong Chi Ming (“Mr C M Wong”), a Registered Structural Engineer and Authorised Person, and Mr Dennis Wong Wing Cheung (“Mr Dennis Wong”), a Registered Building Surveyor and Authorised Person. 

18.  Mr C M Wong conducted a Structural Assessment Report dated 14 November 2016 in respect of the Building.  He identified the following defects:

(1)   while no structural defects were observed in the common area during visual inspection, cracks and water stain were found at 4 locations within the flats; the observed cracks are longitudinal cracks caused by corrosion of the reinforcement;

(2)   open up inspection showed that all 106 steel reinforcement bars exposed are suffering from corrosion with 101 reinforcement bars (95%) suffering from grade 3 corrosion (mild corrosion); the corrosion of steel bars would significantly reduce the flexural and shear strength of the structural elements and hence the effectiveness of the structural elements;

(3)   31% of the covermeter test results showed concrete cover smaller than the design cover such that the corrosion rate of the steel reinforcement will be higher than that allowed for in the original design;

(4)   71% of the carbonation test samples showed depth of carbonation had exceeded the actual concrete surrounding the steel reinforcement bars;

(5)   41% of the core samples had chloride content exceeding 0.40% which can be inferred as moderate risk of corrosion.

19.  Based on his findings above, Mr C M Wong concluded the structural elements of the Building were in a poor condition.  He opined that the structural elements had approached the end of their design life of 50 years.  Mr C M Wong explained the importance of ductility and robustness, both of which were absence in the design requirements at the time of the construction of the Building. The corrosion of the reinforcement bars had entered the propagation phase and extensive maintenance and repair works would be required in the near future.  Mr C M Wong said that the design and construction of the structural frames had become obsolete over time and the structures failed to meet the current safety standard.  He recommended that hammer tapping works be carried out to all the structural members and he also recommended that all revealed cracks and spalling should be patch repaired, the costs of which total about $42,347. He also estimated the costs for applying elastomeric cementitious coating on clean concrete surface after removing existing plaster or tiles to be about $791,250 without the inclusion of the costs of reinstatement of the removed plaster or tiles.

20.  Mr Dennis Wong also prepared a condition survey report dated 14 November 2016 in respect of the Building.  He stated that the Building was in a state of disrepair with many of its components, finishes and services installations requiring high cost in maintaining it in a tenantable condition.

21.  Mr Dennis Wong estimated that the total costs of immediate repair works to restore the Building to tenantable standard would come to $5,197,705 which is about 35.63% of the cost of constructing a similar new building.  He concluded that the Building had deteriorated to a state which is beyond reasonable economic repair.  Also the carrying out of the essential repairs would cause considerable disturbance and would require a very long implementation period.  It is inevitable that the occupation and enjoyment of the flats would be affected intermittently during the course of the repair. For flats with substantial unauthorized building works, the occupants would have to be evacuated during the carrying out of work for safety reasons.

22.  Mr Dennis Wong also pointed out that even after essential repair works have been implemented, the Building will remain an old residential cum commercial building with out-dated design and construction which not only falls below market expectations but also constituts a continuing repair liability to the owners. 

23.  As said, the respondent did not seek to challenge these expert evidences at the hearing.

24.  Having considered the evidence before the Tribunal, I am satisfied that redevelopment of the Building is justified due to the age and state of repair of the existing development on the Lot.

Section 4(2)(b) – WhetherApplicant has taken reasonable steps

25.  The applicant is under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondent owning minority interests in the Lot under section 4(2)(b) of the Ordinance.

26.  In this regard, the applicant had made 3 offers to the respondent from 13 April 2015 to 23 November 2015 in the sum about $150 million/ $160 million which were higher than the assessment by Mr Alnwick Chan (“Mr Chan”) of Knight Frank Petty Limited at then 36.89% of the respondent’s proportionate share of the RDV as at 1 June 2016. The respondent did not accept any of the offers.

27.  On 19 April 2017, the applicant made the 4^th offer to purchase the respondent’s units for $180,581,440. This offer was accompanied by a letter of Mr Chan in which he had adopted 43.16% as proposed by the respondent’s valuation expert, Mr Patrick Lai (“Mr Lai”) in assessing the respondent’s proportionate share of the RDV at $403,400,000 which was even higher than the RDV assessed by Mr Lai at $303,000,000. On 10 May 2017, despite the change of representing solicitors by the respondent, this offer was rejected.

28.  Following the Agreement (where the sharing ratio of the respondent’s units was agreed at 42%) and the updated RDV reports from Mr Chan and Mr Lai, on 14 June 2017, the applicant made the 5^th and the last offer to the respondent also at $180,581,440. The updated RDV assessed by Mr Lai was $323,800,000 and that by Mr Chan was $413,700,000 so that 42% of $413,700,000 yields only $173,754,000. This offer was rejected by the respondent on 15 June 2017.

29.  In Intelligent House Limited 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.”

30.  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 emphasised at §33 that:

“… 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.”[1]

31.  Bearing in mind the above and in particular the respondent’s position before the hearing having been that the RDV assessed by Mr Chan was too high (ie higher than the RDV assessed by Mr Lai), I am satisfied that on the evidence available and in the circumstances of the Application, the applicant has taken reasonable steps to acquire all the undivided shares in the Lot which include negotiating for the purchase of those shares owned by the respondent on terms that are fair and reasonable.

32.  Having considered the above, this Tribunal is satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale sought by the applicant should be granted.

Disputeson the estimation of the RDV of the Lot

33.  The only major issue remaining at trial was the determination of the RDV as the reserve price when the compulsory sale order is granted by the Tribunal.

34.  At the beginning of hearing, Mr Sham conceded that the respondent is no longer challenging the RDV assessed by Mr Chan being too high. Instead, Mr Sham seeks to increase the RDV as assessed by Mr Chan.

35.  It is undisputed that both Mr Chan and Mr Lai had resorted to the residual valuation method in determining the RDV of the Lot. This is done by deducting development costs (including construction cost, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed optimum development.

36.  By reference to the Joint Expert Statement prepared by Mr Chan and Mr Lai on 19 June 2017, the two valuation experts had the following agreements/disagreements:²

		Mr Chan		Mr Lai
Date of Valuation:		2 May 2017
Assumed Development:		A 25-storey commercial building, with a roof signage, designated for retail, dining and entertainment purpose		A 25-storey commercial building for shop or service trade uses
Vertical Circulation:		2 passenger lifts and 2 common staircases
Registered Site Area:		170.56 sq m
Right of Way Area:		18.95 sq m
Buildable Site Area:		151.61 sq m
Site Level:		4.90 mPD
Max Gross Floor Area (“GFA”) under B(P)R:		2,558.4 sq m (PR 15)
Max Building Height under OZP:		130.0 mPD
Class of Site under B(P)R:		Class A
Proposed Building Height:		125.0 m (excl height of the proposed rooftop signage)		117.5 m
G/F Shop(s)	Saleable Area:	81.03 sq m		101.61 sq m
	Common Area:	45.00 sq m		45.00 sq m
	Adopted Unit Rate:	$1,682,000/sq m		$1,550,000/sq m
Cockloft	Saleable Area:	N/A		46.17 sq m
	Adopted Unit Rate:	N/A		$388,000/sq m
1/F-24/F Shop(s)	Saleable Area:	1,702.37 sq m		N/A
	Common Area:	35.00 sq m (1/F -2/F)	30.00 sq m (3/F -24/F)
	Adopted Unit Rate:	$332,000/sq m
1/[2]F-2/F Shop(s)	Saleable Area:	N/A		213.22 sq m
	Common Area:			40.00 sq m
	Adopted Unit Rate:			$387,000/sq m
4/F-24/F Shop(s)	Saleable Area:	N/A		1,227.42 sq m
	Common Area:			40.00 sq m
	Adopted Unit Rate:			$316,000/sq m
Flat Roof	Area:	53.67 sq m (on 3/F)		N/A
	Adopted Unit Rate:	$50,000/sq m
	Conversion Factor:	1/6
Rooftop Signage	Dimensions:	12 m (L) x 5 m (H) supported by a 5 m (H) metal frame		N/A
	Adopted GDV:	$5,700,000
Marketing Cost:		1%
Demolition Cost:		$1,541,000 (based on Existing GFA: 731.77 sq m)
Construction Cost (Ginza):		$33,302/sq m on the basis of Medium Quality and on GFA		$43,340/sq m on the basis of High Quality and on GFA
Rooftop Signage		$2,650,000		N/A
Total Construction Cost		$87,849,071		$115,479,154
Demolition Period		0.75 year
Construction Period		2.5 years
Deferment Rate		5%
Professional Fee		6%
Developer’s Profit on cost and land		20%		25%
Land Value		$413.70 M*		$323.80 M

* Mr Chan has revised his valuation to $421,900,000 on the basis of updated time index.

Assessment of GDV - G/F

37.  Discarding a latest sale of a shop which Mr Chan considers different from the hypothetical shop in location, trading potential, pedestrian flow and layout etc, Mr Chan has basically only 2 comparables, one at G/F, 51 Jardine’s Bazaar and the other at 59 Percival Street as follows:

Comp	Address	Age of Building	Date of Sale	Consideration	Saleable Area (m2)	Frontage (m)	Depth (m)	Head-room (m)	Unit Price (/m2)
2.	Shop A, G/F, 51 Jardine’s Bazaar	1988	9 Mar 16	$68,800,000	40.18	3.34	15.47	3.50	$1,712,295
3.	G/F & C/L, 59 Percival Street	1954	6 Oct 15	$92,800,000	50.14 + C/L 14.09	4.18	15.24	2.9	$1,655,369

38.  “Comparable 2 at No 51 Jardine’s Bazaar is identical to the Property in terms of pedestrian flow. The Respondent’s expert challenged the validity of this comparable as it was sold with a sale and lease back arrangement. Nevertheless, it is a good reference transaction as the initial yield derived from the information contained in the Agreement for Sale and Purchase is approximately 3% and represents the market yield.”[3] Despite this comment as stated in his Supplemental Report dated 5 June 2017, Mr Chan does not rely on this comparable in the end.

39.  Instead, Mr Chan relies mainly on comparable 3 and arrives at a unit rate of $1,720,000/sq m though he had carried out analysis of the 2 comparables as follows:

Comp	Unit Price (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Age	Frontage	Headroom	Size	Layout	Total
2.	$1,712,295	2.6%	-10%	2%	3%	3%	0%	3%	3.6%	$1,773,938
3.	$1,655,369	-3.6%	-10%	6%	1%	4%	3%	3%	3.4%	$1,711,652

40.  Without the aid of his own valuation expert, Mr Sham has difficulty in challenging the assessment of Mr Chan. However, I agree with Mr Sham that, in light of what Mr Chan stated in his Supplemental Report dated 5 June 2017, it would be more reasonable to adopt the average of the 2 adjusted comparables, ie $1,742,795/sq m or say $1,740,000/sq m.

41.  In Mr Chan’s hypothetical model, he has allowed for 2 shops on G/F, one with a saleable area of 42.84 sq m and the other 38.19 sq m after provision of a lobby of 45.00 sq m and a transformer room of 25.58 sq m. In this regard, Mr Chan makes reference to the provision of similar transformer room at the Sharp, a 32-storey Ginza-style commercial building completed in February 2016 at 11 & 13 Sharp Street on a slightly larger site about one block away from the Lot.

42.  Mr Sham challenges whether such a transformer room is really needed, making reference to a similar Ginza-style development, Oliv, at 15 Sharp Street where there appears to be no provision of a transformer room. During cross-examination, Mr Chan replied that he had made enquiry to the Hongkong Electric Company Limited, the sole electricity provider on Hong Kong Island. He found such a transformer room would only be exempted if there be sufficient surplus capacity left from existing low voltage network; he finds no evidence of any such sufficient surplus capacity left. Nor can Mr Sham find evidence to the contrary except by reference to Oliv which was built earlier in 2013.

43.  On the balance of probabilities, I accept the evidence of Mr Chan that a transformer room would be required on-site. That the transformer room at the Sharp would provide surplus electricity capacity to the Lot, as suggested by Mr Sham, is purely speculative. Following Mr Chan’s approach in assessments as shown at Bundle III/F/1331(A), I arrive at a GDV for G/F at $140,328,000.

Assessment of GDV - U/F

44.  Again, in assessing the GDV for the upper floors, Mr Chan relies on only one comparable – the sale of 17/F, Oliv, 15 Sharp Street ie KF1 on 9 March 2016 despite he notes the following transactions as well:

Comp	Address	Age of Building	Date of Sale	Consideration	Saleable Area (m2)	Headroom (m)	Effective Area (m2)	Unit Price (/m2)
KF1	17/F, Oliv, 15 Sharp Street	2013	9 Mar 16	$41,000,000	129.43	4.98	129.43	$316,774
KF2	10/F, Oliv, 15 Sharp Street	2013	4 Sep 14	$46,238,400	152.45	4.98	152.45	$303,302
KF3	20/F, Oliv, 15 Sharp Street	2013	4 Sep 14	$46,800,000	135.44	4.98	135.44	$345,540
KF4	21/F, Oliv, 15 Sharp Street	2013	4 Sep 14	$37,820,000	137.29	4.98	137.29	$275,475
KF5	7/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	8 Sep 15	$97,000,000	298.73	3.50	298.73	$324,708
KF6	6/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	7 Sep 15	$102,000,000	298.73 + Flat Roof 4.23	3.50	299.44	$340,636
KF7	28/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	25 Jun 15	$117,000,000	298.73	3.50	298.73	$391,658
KF8	Unit A,, 9/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	18 May 15	$19,958,400	47.56	3.50	47.56	$419,647
KF9	Unit B, 9/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	18 May 15	$14,911,200	30.62	3.50	30.62	$486,976
KF10	Unit C, 9/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	18 May 15	$19,859,200	43.67	3.50	43.67	$454,756

45.  As can be seen from the above, all those transactions are dated sales and Mr Chan explains that even the Private Retail Price index published by the Rating and Valuation Department (“RVD index”) which has been borrowed as reference for time adjustment is not reliable for Ginza type development as envisaged for the hypothetical development.

46.  For the purpose of illustration, Mr Chan has prepared an analysis which is produced as Exhibit A2 showing that although during the interim periods among the above transactions, the RVD index shows a minor increase, these transactions demonstrate a drop in value as much as 40% or thereabouts.

47.  Therefore, Mr Chan relies on only KF1 which is the most recent transaction in comparison though it took place also more than a year ago. Mr Chan analysed the adjusted rate to be $337,681/sq m. Again, Mr Sham failed to challenge this analysis.

48.  On the other hand, Mr Sham suggests, in addition to the further adjustments by Mr Chan on street exposure for 1/F at +10% and for 2/F at +5% in respect of the hypothetical development, there should be upward adjustments for convenient access and flexibility of layout for these lower floors. I agree with Mr Chan that with efficient provision of lifts, the further attraction of these lower floors through access by staircases would be minimal bearing in mind the headroom for each storey in the hypothetical development is 5m. I also agree with Mr Chan that by breaking down these 2 floors into smaller units for analysis, it would have incorporated a degree of flexibility in layout; otherwise, each floor with a saleable area of about 100 sq m may be too large or too expensive for the prospective users.

49.  In his closing submission, Mr Sham however criticizes that, contrary to the positive “flexibility” and “convenience” factors, Mr Chan has made a downward adjustment for “floor”, namely -12% for 1/F and -11% for 2/F. As rightly pointed out by Mr Mok, such adjustment for floor is usually adopted by valuers and indeed in the captioned case also agreed by Mr Lai in his joint statement with Mr Chan on 19 June 2017 though the quantum of adjustment suggested by Mr Lai was even larger[4]. Indeed, Mr Sham did not cross-examine Mr Chan on this issue and it is too late “to spring a surprise attack in the closing submissions”, the wordings used by Mr Mok in response.

50.  Mr Mok also contends that the ‘floor’ adjustment is a different and independent factor of adjustment separated from ‘flexibility’ and ‘convenience’. To this I agree.

51.  As a result, I accept Mr Chan’s total assessment of the GDV for the upper floors which is in the sum of $574,404,471 as stated at Bundle F/1338(A) based on an effective area of 1,702.37 sq m.

52.  Thus, the total GDV of the hypothetical development excluding the value of the Rooftop signage is $717,469,641 or$280,437/sq m.

Assessment of GDV - Rooftop

53.  Mr Chan proposes a rooftop signage for the reason that he identifies a rooftop signage at Southern Pearl Court, 151-153 Wong Nai Chung Road which is visible from the Happy Valley sports grounds. Mr Chan contends that a rooftop signage at the hypothetical development would be similarly visible.

54.  However, Mr Chan cannot find any comparable sale but relies on the rateable value of this comparable at $576,000 per annum and assumes a 30% discount for location to arrive at his assessment of rental value $400,000 per annum for his proposed signage. Then Mr Chan takes a 7% yield to get his assessment of $5,700,000.

55.  In 梁續有(以天祥參茸藥行的名營業) v地政總署署長, LDLR 4/2006 (unreported, dated 22 February 2008), the Lands Tribunal remarked at §46 as follows:

“Although it is not the same as the market rent at any particular time, the rateable value of a property is an estimate of the annual rental value of the property at a designated valuation reference date (i.e. 1 October of each year), assuming that the property was then vacant and to let. In the absence of any evidence on market rent, the rateable value can be an indication of the level of rent a property can attract.”

56.  More recently, the District Court has also made similar observation in 皇河實業有限公司v Wan Chiu Yuen & Another, DCCJ4448/2011 (unreported, dated 20 April 2015) at §204:

“The Rating and Valuation Department with its statutory authority should have collected a representative percentage, if not all, of the rental transactions at the material times to assess rateable value of properties. Of course special features of individual property such as internal decoration; historical nature of the information obtained by the Rating and Valuation Department and change of market conditions after the designated valuation reference date will all affect the valuation of market rental at a particular date. It should also not be forgotten that the rateable value of a property is assessed for the purpose of determining how much is payable as rates for the property. Various adjustments have been made by the Rating and Valuation Department to the data collected to achieve the statutory purposes. The rateable value is not the exact rental which a particular property may fetch in the open market but it provides a useful reference of the market rental of a property.”

57.  In any event, Mr Sham has not challenged Mr Chan’s assessment and as $5,700,000 is not a significant amount especially when Mr Chan has provisioned for a construction cost of $2,650,000, I accept his valuation.

Construction Cost

58.  In arriving at his construction cost of $33,302/sq m, Mr Chan has relied on the building cost data published by Rider Levett Bucknall assuming a “Medium Quality Office Building”. In answer to Mr Sham’s cross-examination at trial, Mr Chan gave evidence that the construction cost for a Ginza type commercial building would not be significantly higher though it has to take into account the provision of exhaust system, grease trap and extra electricity/gas supply and wider staircases for escape necessitated by the eateries. Nevertheless, I consider his assumption of “Medium Quality Office Building” might not be so appropriate if such additional costs are taken into account. Instead I would adopt $35,000/sq m.

Developer’s Profit

59.  At trial, Mr Chan conceded that for a hypothetical Ginza type development, he had been consistently adopting a developer’s profit of 20% on costs. Cheer Capital Limited v Unibase Investment Limited & Others, LDCS 5000 & 6000/2013 (unreported, dated 12 June 2015) is a case, for instance, in which the Lands Tribunal accepted his proposed developer’s profit of 20%.

60.  On the other hand, Mr Chan also conceded that the retail market had rebounded and the market sentiment had improved. Despite that, Mr Chan maintained his view that a developer’s profit of 20% is appropriate.

61.  Developer’s profit is allowed in residual valuation for the purpose of compensating for the risk taken by developers in undertaking property development. In Hong Kong it is usual to assume that the developer seeks a capital profit expressed as a percentage of the total development cost (including interest) but such a percentage can never be a constant.  “The target levels of profit will depend on the nature of development and allied risks, the competition for development schemes in the market, the period of the development and the general optimism in relation to that form of development.”[5]

62.  More recently, the HKIS Guidance Notes on Valuation of Development Land contains the following provisions:

“3.6.4 Developer’s profit needs to reflect:

i. The nature of the development and related risks. These include marketing risks for sales and lettings, risks of construction difficulties and cost overruns, and delays in obtaining relevant development approvals.

ii. Competition and market demand for the type of development scheme, plus:

iii. The development duration, since lengthening the development period will escalate the necessary return on outlays and capital.

3.6.5 Straightforward developments catering to strong market demand will serve to reduce risk, and thus profit rate expectation.”

63.  Indeed, the strong market demand especially in the vicinity of the Lot is supported by market news as reported by the Hong Kong Economic Times on 5 July 2017 (“Exhibit A6”). It was reported that a Ginza style commercial building, renovated some 3 years ago, situated at 38 Yiu Wa Street around the corner of the Lot with about 7,400 sq m was just sold for $2,000,000,000 (or $270,000/sq m). Also, two commercial buildings at the end of Sugar Street with a total gross floor area of 5,796 sq m or thereabouts were just sold at $289,851/sq m[6]. Lastly, a service apartment situated near the junction of Irving Street and Pennington Street (ie a corner site) was sold in January 2017 for redevelopment at $1,700,000,000 or an accommodation value about $215,000/sq m[7].

64.  In addition, when compared with Cheer Capital where the total GFA was about 9,695 sq m, the scale of development in the present case is much smaller and the construction period of 30 months is also shorter so that the developer can expect a quicker return. In the circumstances of this case, therefore, I am prepared to adopt a developer’s profit of 15%.

Finding on RDV and the Reserve Price

65.  Whereas the other development parameters are not in dispute, subject to what I have stated above, I follow Mr Chan’s residual valuation at Bundle III/F/1353(A) as a template and have prepared a residual valuation at Appendix A hereof. I arrive at $441,000,000 or an accommodation value of $172,373/sq m.

66.  The major shortcoming of the residual valuation method is that there are many variables or assumptions as to inputs so that a minor variation in any of the factors involved may be compounded when they are carried forward throughout the lifespan of the project, thus producing a major effect on the final value of the scheme.[8] In the professional guidance: Valuation of Development Land, Hong Kong, 1st edition published by the Royal Institution of Chartered Surveyors, it is recommended that an attempt be made by the valuers to compare the result with such market evidence as may exist because the residual method sometimes produces theoretical results that are out of line with prices being achieved in the market. In this regard, I consider the accommodation value of $172,373/sq m is reasonably comparable to the reported sale of the service apartment situated near the junction of Irving Street and Pennington Street, supra, taking into account the location, the small size of the Lot or the hypothetical development.

67.  I determine, therefore, the reserve price at $441,000,000.

Other Incidental Matters

68.  The applicant proposes to appoint Mr Ho Hing Choi Peter (何慶材) and Mr Yip Tung Sang (葉冬生), both partners of Messrs Mayer Brown JSM, as the sale trustees.  By reference to a letter dated 27 June 2017from the latter, I am satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance.  The remuneration package proposed in the said letter appears to be reasonable.

69.  In the same letter, it is also proposed to appoint Messrs. Michael Cheuk, Wong & Kee as independent legal adviser for the Trustees (“the Trustees’ Solicitors”). The remuneration package proposed in the said letter appears to be reasonable too.

70.  The applicant has prepared a set of draft Particulars and Conditions of Sale of the Lot[9].  Subject to any amendment that may become necessary as a result of my ruling on the arrangement of auction above, the particulars and conditions of sale of the Lot by public auction submitted by the applicant are also reasonable.

Order

71.  This Tribunal make the following orders:

(1) this Tribunal is satisfied that the redevelopment of the Lot is justified due to the “age” and “state of repair” of the Building and that the applicant has taken reasonable steps to acquire all the units in the Building including that of the respondent;

(2) an order for sale of all the undivided shares in the Lot should be made by auction pursuant to section 5(1)(a) of the Ordinance;

(3) the reserve price for the sale of the Lot be set at $441,000,000;

(4) the entire amount of the proceeds of sale of the Lot (after deduction of all legitimate expenses and payments) be apportioned between the applicant and the respondent by reference to the agreed EUVs of their units as set out at Bundle III/F/1419;

(5) Mr Ho Hing Choi Peter (何慶材) and Mr Yip Tung Sang (葉冬生), nominated by the applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustee under the Ordinance in relation to the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs Mayer Brown JSMdated 27 June 2017;

(6) Messrs Michael Cheuk, Wong & Kee be appointed as the solicitors for the Trustees (“the Trustees’ Solicitors”) to assist the Trustees in discharging their duties imposed by the Ordinance and the Trustees’ Solicitors be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Mayer Brown JSM dated 27 June 2017;

(7) for the purposes of the sale of the Lot by public auction, 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 as set out in Bundle IV/307-336 to be initialled and approved by the Tribunal.

(8) 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 development to be erected thereon 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; and

(9) liberty to the applicant, the respondent and the Trustees to apply to the Tribunal for further directions.

Costs

72.  Following the principles laid down in Good Faith Properties Ltd v Cibean Development Co Ltd [2014] 5 HKLRD 534, I make a Costs order nisi that the applicant do pay the respondent costs of the Application, including all costs reserved to be taxed if not agreed on High Court Scale. Such order be made absolute after 14 days if no application is made to vary the said Costs order.