FIRST MATE DEVELOPMENT LTD v. GEE WING CHUNG, THE ADMINISTRATOR OF THE ESTATE OF LIU WAI YAN ALSO KNOWN AS BO FONG LIU GEE, DECEASED AND OTHERS

LDCS 8000/2016

[2018] HKLdT 16

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 8000 OF 2016

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D E C I S I O N
(Leave to Appeal on Interlocutory Application)

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1.  On 19 January 2018, this Tribunal handed down its reasons for decision made on 5 January 2018 (“the Decision”), inter alia, dismissing an application by the 2^nd respondent (“R2”) for leave to file and exchange supplemental valuation report on marriage value.

2.  It is trite that under Section 11AA (6) of the Lands Tribunal Ordinance (“LTO”): -

“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.”

3.  On 23 February 2018, R2 filed a Notice to Appeal on the following grounds:

(1)   The Tribunal has erred in law in holding that, upon proper construction of Paragraph 2 of Schedule 2 of the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”), in assessing the reserve price of the subject lot, the Tribunal can only consider the redevelopment potential of the subject lot on its own;

(2)   The Tribunal has erred in law in holding that Paragraph 2 of Schedule 2 of the Ordinance has operated to qualify or exclude the basis of market value in that any enhanced bid a willing buyer may offer or any potentialities that may have existed by reason of a possible agglomeration of sites shall be excluded;

(3)   The correct interpretation of Paragraph 2 is that there has to be assumed a hypothetical sale of a lot with that lot sold by itself and not as part of some larger entity of land and with the sale price of that larger entity then apportioned in some arbitrary fashion in order to find the value of the lot;

(4)   It is not in practice possible to value a piece of land without taking into account the potential for development of other land adjoining it or in its vicinity since the prospect of such other development is an integral component of the value of the piece of land in question;

(5)   If an attempt were made to value a piece of land ignoring its potential for development as a part of a larger development the result would be an artificially reduced value of the piece of land in question. The legislation here being applied is in effect a power of compulsory purchase in private hands and to allow a person’s land to be taken from him by compulsion for the benefit of others at a price less than it could command in the open market would be a patent injustice;

(6)   The decision of the Tribunal flouts the principle of equivalence, namely that the compensation for the acquisition of an interest in land, should not be less than its true value and not less than the actual loss to the landowner, and is for that reason unjust; and

(7)   The following question of law is of great and general public importance and also in the interest of justice the appeal should be decided by the Court of Appeal: -

Upon proper construction of Paragraph 2 of Schedule 2 of the Ordinance, whether any potentialities that may have existed or attached to the subject lot by reason of a possible agglomeration of sites shall be excluded in the determination of its reserved price.

Further Submission by R2

4.  Notwithstanding the above, R2 filed further submission for arguments on 2 March 2018, proposing “to clarify the scope/nature of the application first”.

5.  R2 submits that there are at least 3 possible meanings for the term “marriage value”, ie: -

(1)   the merger of different interests as in the case of Mountview Estates Ltd v London Borough of Enfield (1969) 20 P & CR 729[1] which has nothing to do in the present application;

(2)   the 2^nd one involving a factual assumption that there is a joint development by combining 2 sites, ie an extrinsic fact other than the Subject Lot which R2 concedes, for the purpose of this application, what the words “on its own” in Paragraph 2 of Schedule 2 of the Ordinance tend to exclude from the Tribunal’s consideration for the reserve price; and

(3)   a “Clay Factor”, a nomenclature following from IRC v Clay [1914] 3 KB 466[2], which, as argued by R2, is not excluded by the words “on its own” in Paragraph 2 of Schedule 2 of the Ordinance.

6.  R2 submits that in valuing the Clay Factor, a valuer does not take into account any extrinsic fact, but only whatever objective facts which are in the public domain relevant to the Subject Lot itself.

7.  The usual difficulty of a valuer in assessing the Clay Factor is how to assess its value, ie whether the Subject Lot is of (special) interest to owners of one (or more) adjoining site which is entirely a question of evidence.

8.  At the hearing on 6 March 2018, Mr Benjamin Chain (“Mr Chain”), counsel for R2, emphasized the question should be a matter of evidence and the Tribunal should not pre-judge on its admissibility. R2’s present application is limited to the Clay Factor as its valuer at the time of her original report was not aware of the status of the 2 adjoining sites. Had it been otherwise, she would have taken that into account in arriving at her original valuation and no question of leave would have arisen. At trial, she would be cross-examined on that and her evidence may, or may not be accepted.

9.  In aid of his argument, Mr Chain referred to Trocette Property Co Ltd v Greater London Council (1974) 28 P & CR 408[3] at 422 per Lawton LJ as follows:

“In my judgment, this passage (of the English Lands Tribunal given by John Watson, Esq, FRICS) is too broadly stated and is not apt to cover the unusual facts of the present case. In most cases it may well be that the personal characteristics of the parties are irrelevant, but if the evidence in a particular case establishes that buyers would be likely to be put off bidding

beyond a certain figure because of the existence of an unusual factor such as the likely refusal to cooperate of a freeholder whose cooperation is essential if the full potential of the premises or site is to be released then the existence of that factor should be taken into consideration in assessing compensation, and this would be so whatever the reason for the existence of that factor might be. The assessment of compensation under rule (2) of section 5 of the Act of 1961 is not concerned with the search for an economic abstraction - a valuer’s Holy Grail – but with “… the amount which the land if sold in the open market by a willing seller might be expected to realise: …” Who are likely to be buyers in such a market will depend on the facts of each case, and what they would be likely to bid, and their reasons for doing so, will also depend on the facts.” (emphasis added)

10.  In the present application, Mr Chain, submits, the “unusual factor” that the adjoining owners are indeed interested is not even disputed.

11.  In gist, Mr Chain contends that the proposed appeal satisfies both limbs of s.11AA (6) in that there is at least an arguable case and also “in the interests of justice” that deserves a ruling by the Court of Appeal.

Applicant’s Opposition

12.  Ms Nancy Ngai (“Ms Ngai”), counsel for the applicant, submits that leave to appeal should not be granted to R2.

13.  Ms Ngai puts forth R2’s argument as follows:

(1)   The applicant, being the sole owner of the 1^st Adjoining Lots and the majority owner of the 2^nd Adjoining Lots, applying the same nomenclature as adopted in the Decision, is a “special purchaser” having a “special interest” who would likely pay more than the Subject Lot would be worth to anybody else because the Subject lot is located next to the 1^st Adjoining Lots and the 2^nd Adjoining Lots and because the applicant has an intention to redevelop the 3 groups of lots together as a whole;

(2)   Apart from the applicant, there may be other persons, such as property brokers, competing in the market for what they know the applicant wants, with the view to a resale to it at an enhanced price so as to realise a profit as per Swinfen Eady LJ in IRC v Clay, supra;

(3)   Therefore, the open market value of the Subject Lot on redevelopment basis should be the RDV of the Subject Lot on its own plus an enhanced value, which is referred to by R2 as “marriage value”, reflecting the potentiality of joint redevelopment of the Subject Lots together with the 1^st Adjoining Lots and the 2^nd Adjoining Lots as an enlarged merged site; and

(4)   Hence, the reserve price to be set under Paragraph 2 of Schedule 2 of the Ordinance for the sale of the Subject Lot in auction should be the RDV of the Subject Lot on its own plus such “marriage value”.

14.  Ms Ngai submits that R2’s intended appeal does not have any reasonable prospect of success. She makes reference to the Hong Kong Civil Procedure 2018 which at §59/2A/4 (p 1142) states:

“In Wynn Resorts (Macau) SA v Mong Henry (unrep, [2009] HKEC 1293, Chu J (as she then was) observed that:-

“The adoption of the “reasonable prospect of success” test, as opposed to the “real prospect of success” test, in our legislation is not accidental. In the Interim Report of the Chief Justice’s Working Party on Civil Justice Reform (2001), the proposal was to adopt the “real prospect of success” test as the threshold for granting leave to appeal: Proposal 44 and paras 535-539. In the Final Report (2004), however, the Working Party decided to adopt as the test for granting leave a requirement that the appeal has reasonable prospects of success, as conveying the notion that the prospects of succeeding in the appeal must be “reasonable” and therefore more than “not fanciful”, without having to be “probable”: Recommendation 115 and para 656.

To meet the “reasonable prospects of success” test, an applicant is required to show more than just an arguable case, but an appeal that has merits and ought to be heard, although he does not have to demonstrate that the appeal will probably succeed.” (Emphasis added)

15.  Ms Ngai submits that the question as to whether the so-called “Clay Factor” should be taken into account in the determination of reserve price has already been considered by the Court of Appeal in Fully H K Investments Ltd and Others v Poon Vai Ching, the Executrix of the Will of Poon Kam Chuen (Deceased) and Others, HCMP 591/2007 (unreported, dated 4 April 2007).

16.  In this Fully H K Investments case, the minority owner respondent argued that the reserve price should include an enhanced value on the ground that the majority owner applicant or its related company called Luck Dragon might pay a price higher than what the lot would be worth to anybody else given Luck Dragon was the only one person capable of redeveloping the lot into a more valuable form of building with plot ratio 9 as opposed to plot ratio 5.

17.  The Tribunal (then differently constituted):-

(a) determined the reserve price on the basis of plot ratio 5; and

(b) held that it was fair and reasonable to make offers based on the assessment with plot ratio 5.

18.  Before the Court of Appeal,  relying on the UK authorities, namely IRC v Clay, supra and Raja v Vizagapatam [1939] AC 302[4], the minority owner respondent argued that:-

“13. …… the Tribunal erred in so concluding in that the value of the lot was based exclusively on plot ratio 5 and the existence of a ‘special interest’ purchaser (viz. the owner of the approved plans based on plot ratio 9) to whom the lot would be worth considerably more was totally disregarded. It was said that a value should have been attributed to that factor in assessing the value of the lot since that exercise had to be undertaken before a view could be formed as to the fairness and reasonableness of the offer.

……

……

17.…… this principle (which I will refer to as “the Clay factor”) was applicable in the present case because Luck Dragon was likely to offer more than the property would be worth to anybody else because of its ability to utilise the approved plans based on plot ratio 9. …… the Tribunal erred in disregarding that fact.”

19.  Hon Le Pichon JA (as she then was) held from §§18 to 21 as follows:

“18. I do not consider those authorities to be of assistance to the second respondent. As Mr Mok who appeared for the applicants rightly submitted, the Raja line of cases establishes assumptions for assessments and valuation purposes that apply in a context where there is absolutely no possibility of an actual auction. Where, as here, there is to be a public auction, the factors mentioned in the judgment of Swinfen Eady LJ quoted above would be matters thatwould be taken care of bythe actual process of the public auction. To say that the Tribunal should seek to attribute a value to those factors so as to establish a valuation by reference to which the fairness and reasonableness of the offer is to be determined is little short of inviting the Tribunal, as it were, to second guess the outcome of the public auction. That is at odds with the principles set out in Capital Well.

19. It is clear from that decision that in assessing whether reasonable steps had been taken by the majority owners under section 4(2)(b) of the Ordinance, the role of the Tribunal is not to conduct a valuation exercise. Mr Smith SC sought to distinguish Capital Well on the basis that the Tribunal’s finding in that case was made on the basis of both sides’ valuation evidence on the open market value of all six lots, taking account of the composite sites redevelopment potential. He submitted that this was not the present case since what is in the issue is the Tribunal’s assessment of the lot’s redevelopment potential. But if Capital Well is properly understood, it is not distinguishable. What according to Mr Smith SC the Tribunal ought to have done is precisely what the Court of Final Appeal held a Tribunal should not do – to engage in a valuation exercise that decides what valuation principles ought or ought not be adopted such as ‘marriage value’ ‘strategic position’ ‘special interest’ and the like and how they are to be assessed.

20. The value of the lot on the basis of plot ratio 5 is not in dispute. As to the question how the court is to “decide what figure to put on top” of the plot ratio 5 to reflect the Clay factor, the second respondent’s stance below was that that was a question of quantum. Yet, it is clear from the transcript of the evidence of the second respondent’s expert that he could not tell what the quantum was except that it should be somewhere between the levels of plot ratio 5 and plot ratio9. As I have said, that is a matter that is to be resolved as part of the actual auction process.

21. In my view, I have no hesitation in concluding that the second respondent failed to demonstrate a real prospect of success on the merits. Even if (contrary to my view) the delay where held to be excusable, the second respondent has failed to show an arguable appeal.” (emphasis added)

20.  Ms Ngai submits that although in the Fully H K Investments case, the applicable test applied was “real prospect of success” while in the present case, the applicable test is “reasonable prospect of success”, such difference is immaterial in dealing with R2’s present application for leave to appeal. There is no other reason in the interests of justice that R2’s intended appeal should be heard by the Court of Appeal.

Discussion

21.  Mr Chain is trying hard to distinguish Fully H K Investments from the present application firstly on the ground that it was an appeal out of time which was decided by a single Justice of Appeal instead of the full Court of Appeal. Mr Chain submits there was no direction in the judgment that the issue argued upon could not be renewed; it was only the 2^nd respondent/appellant there who decided not to take further action before the full Court of Appeal. We consider this distinction irrelevant so far as it is a judgment coming from a higher court which is binding on this Tribunal.  The findings in Fully H K Investments is exactly on the same issue before us and is binding on us.

22.  More importantly, Mr Chain emphasized this Fully H K Investments case was an appeal after a trial where the evidence has been heard. Mr Chain affirms that this is exactly his position because he is not suggesting the Tribunal should take into account the Clay Factor but that should ultimately be the decision of the Tribunal to adjudicate only after hearing evidence which may or may not be accepted, depending on how it comes about, how it is tested under cross-examination. Mr Chain submits Hon Le Pichon JA (as she then was) only came to her conclusion because “it is clear from the transcript of the evidence of the second respondent’s expert that he could not tell what the quantum was except that it should be somewhere between the levels of plot ratio 5 and plot ratio 9.” In contrast, in the present application, the Tribunal has not even heard the evidence on the relevancy of the Clay Factor.

23.  Be that as it may, however, we consider Mr Chain or R2 had confused the “Clay Factor” as a methodology of valuation which, this Tribunal admits, would rarely be expunged as inadmissible before hearing the evidence. But rather, the so-called “Clay Factor” impinges on the very basis of valuation which may be excluded at the outset[5].

24.  We do acknowledge here that we have not gone to the question of quantum on the amount of marriage value or synergistic value as the case may be yet. As we commented at §33 of the Decision, Mr Justice Ribeiro PJ had affirmed thatthe Tribunal is not required to perform any such task.

25.  In any event, at §35 of the Decision we have found the suggestion of marriage value by R2 inconsistent with the requirement under Schedule 2 Paragraph 2 of the Ordinance. To permit R2 or any minority owners to adduce expert report on the amount of marriage value which should otherwise be excluded at the outset would unnecessarily prolong the proceedings, the trial and therefore the costs and expenses deriving thereof.

26.  Here, once again, we would like to repeat our ruling at §34 of the Decision that to the extent that the reserve price pursuant to Schedule 2 Paragraph 2 of the Ordinance is so qualified to the redevelopment potential of the lot “on its own”, the other compensation principles or the principle of equivalence referred to by Mr Chain on the ambit of open market value are irrelevant.

27.  And to the extent that Mr Chain complained that a public auction as envisaged by section 5 of the Ordinance fails to resolve at a fair and reasonable market price of the Subject Lot, taking into consideration the marriage value or the Clay Factor as the case may be, we consider this being the exact purpose why the reserve price pursuant to Schedule 2 Paragraph 2 of the Ordinance is so qualified to the redevelopment potential of the lot “on its own”.

28.  When the marriage value or the Clay Factor whatever it is termed is the result of an ex post facto awakening to the scheme underlying the Ordinance as explained at §31 of the Decision, the Pointe Gourde principle should apply to exclude or disregard the same.

29.  On the second limb of s.11AA (6) of the LTO, given the same issue had already been considered in the Fully H K Investments case, this Tribunal does not agree that leave to appeal should be granted in the interests of justice as contended by R2.

Conclusion and Disposition

30.  In light of the above, we consider R2’s intended appeal has no reasonable prospect of success.

31.  Similarly, R2 fails to satisfy us that there was some other reason “in the interests of justice” why the appeal should be heard and therefore R2’s Interlocutory Application dated 19 January 2018 be dismissed. 

Costs

32.  The usual rule of costs to follow the event should apply. This Tribunal therefore orders that R2 do pay the costs of the applicant with certificate for counsel on High Court scale, to be taxed if not agreed. The costs order is in the form of order nisi. Unless any of the parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from today.

33.  It remains for us to thank counsel on both sides for their able assistance provided to the Tribunal.

LDCS 8000/2016
[2018] HKLdT 4

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 8000 OF 2016

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R E A S O N S  F O R  D E C I S I O N

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1.  This is the application by the 2^nd respondent (“R2”), by way of interlocutory application filed on 31 October 2017 for an extension of time to file and serve a rebuttal valuation report as well as a supplemental report on marriage value (“the Interlocutory Application”).

2.  The applicant raised no objection to the extension of time but objected to the valuation on the basis of marriage value.

3.  After hearing from the parties at the hearing, we dismissed the application for leave to file and exchange supplemental valuation report on marriage value and allowed the R2 14 days to file and serve the rebuttal valuation report in answer to the 2 reports already filed by the applicant only with no order as to costs.

4.  This is the reason for our ruling at the hearing.

Undisputed Background

5.  The applicant, being the majority owner of the land known as No. 46, 48, 50 Gillies Avenue South (“Subject Lot”), filed the application in this case for the compulsory sale of all the undivided shares of the Subject Lot for the purpose of redevelopment pursuant to section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”).

6.  Immediately to the east of the Subject Lot, are the lots known as Nos 22-22A Bulkeley Street (“1st Adjoining Lots”) and Nos 39, 41 Whampoa Street and Nos 12A, 12B, 14, 16, 18, 20 Bulkeley Street (“the 2nd Adjoining Lots”).  The 1st Adjoining Lots are 100% wholly owned by the applicant whilst the 2nd Adjoining Lots are the subject of another compulsory sale application in LDCS 9000/2016 by the same applicant who is holding no less than 80% of the undivided shares in the 2nd Adjoining Lots.

7.  In the Annual Report of Henderson Land 2016, it was stated that the Subject Lot, the 1st Adjoining Lots and the 2nd Adjoining Lots are “newly acquired urban redevelopment projects with 80% or above ownership secured and their ownership will be consolidated by proceedings to court for compulsory sale…” (B/265) and all 3 lots of land were being described under the same redevelopment project generating a site area of 11,900 sq ft and the expected attributable gross floor area upon redevelopment arising therefrom is 107,100 sq ft (B/266).

8.  The first round valuation report was filed and exchanged on 29 September 2017.  It was directed that rebuttal report should be filed and exchanged by 15 October 2017 with such deadline having been subsequently extended to 22 October 2017 by consent of the parties.  On 31 October 2017, the R2 filed the Interlocutory Application.

Marriage Value

9.  It is the submission of Mr Cheng for the R2 that leave to adduce supplemental report on marriage value should be allowed since the open market value of the Subject Lot should include the potential of the adjoining lots.  And in assessing the open market value under the Ordinance, general valuation principles should also be applicable.  These are:

a.   marriage value is a recognized concept in valuation, which will be created if the single, merged interest exceeds the total of the values of the separate interests before the merger; and

b.   all the circumstances of the land should be considered including:

i) “the fact that the property is so situate that to one or more persons it presents greater attractions than to anybody else…” (IRC v Clay [1914] 3 KB 466 at 472);

ii) “the land is not to be valued merely by reference to the use to which it is being put at the time at which its value has to be determined … but also by reference to the uses to which it is reasonably capable of being put in the future.” (Raja v Vizagapatam [1939] AC 302 at 313);

iii) “the characteristics of the site: its size, shape, location, planning, and anything else that might have increased its potentiality, and in consequence its value, for redevelopment.  The last includes any actualities which might had that result…” (Mountview Estates Ltd v London Borough of Enfield (1969) 20 P & CR 729 at 784);

iv) “… expectations about the future which, whether right or wrong, would have influenced the price at which they were willing to deal … if they did exist and would, as a matter of reality, have affected the price which the land would have fetched, they cannot be ignored.” (Penny’s Bay Investment Co Ltd v Director of Lands (2010) 13 HKCFAR 287 at §44); and

v) “… the ‘marriage value’ of the two interests in the land: the claimants’ leasehold interest … and the freehold interests of the landlords … The ‘marriage value’ arises because in the normal way it would sensibly be anticipated that the value of the two interests, merged, would be substantially greater than the sum of the values of the two if each had to be treated as continuing to be separate.” (Trocette Property Co Ltd v Greater London Council (1974) 28 P & CR 408 at 414).

10.  Applying the principles above, Mr Cheng submitted that there is evidence in this case showing that the Subject Lot will be redeveloped together with other adjoining lots and the Subject Lot, if being put into open market would induce the adjoining owners to put up an enhanced bid so that it could fully realise the development potential of the Subject Lot, ie to redevelop the Subject Lots together with the 1st and 2nd Adjoining Lots.  Hence, the marriage value of the Subject Lot together with the 1st and 2nd Adjoining Lots must be considered by this Tribunal in fixing the open market value of the Subject Lot.  To ignore the possibility of redevelopment with other adjoining lots and all the surrounding circumstances would be in violation of the principles of equivalence.  So leave should be granted for supplemental report on this issue to be adduced.

11.  Ms Ngai for the applicant submitted that the merged site redevelopment value or any marriage value are wholly irrelevant to the setting of the reserve price.  According to the plain wordings of section 4(1)(b)(i) and section 5(1)(a) as well as Schedule 2 Paragraph 2 of the Ordinance, the Tribunal shall set a reserve price for the sale of the subject of the auction taking into account the redevelopment potential of the subject of the auction only.  And the merged site redevelopment value or marriage value are also wholly irrelevant to the assessment of the reasonableness of the offer made by the applicant to the respondents (Super Fortune Investment Ltd v Keynote Enterprises Limited (unreported) LDCS 19000/2012 dated 18 June 2013).

12.  In any event, since the applicant had already acquired all the undivided shares in the 1st Adjoining Lots, it cannot be the subject of any compulsory sale application (Bond Star Development Ltd v Capital Well Ltd [2004] 2 HKLRD 855).  And the contention by the R2 is based on the wrong assumption that the applicant will be successful in getting a sale order for the 2nd Adjoining Lots and the applicant will necessarily be the successful purchaser in the auction as well.

Discussion

13.  Even though Mr Cheng had adopted the term “marriage value”, the gist of his submissions is asking this Tribunal to take into consideration the redevelopment potential of the Subject Lot on a merged site basis together with the 1st and 2nd Adjoining Lots.

14.  In First Kind Limited and others v Wong Fu Cheung and others (unreported) LDCS 12000-15000/2014 and LDCS 20000 & 21000/2014 dated 6 May 2016, one of the issues is “in the event that only one lot (or only one pair of buildings comprised in an application) is ordered to be sold by public auction under the LSCRO, whether the Tribunal has a duty and/or power and/or discretion under the LSCRO to direct that the reserve price of that lot be set to reflect its share in the full redevelopment value of the 12 lots as a merged site” (at §15(vi)).  His Honor Judge Wong, having considered the judgments of differently constituted panels of the Lands Tribunal and the Court of Appeal over the same issue on merged site valuation (§§26-51), came to the conclusion that:

“60. Fully in the CA can be relied on to support a proposition that the redevelopment potential arising from the majority owner’s ownership of adjoining lots is a piece of property owned by the majority owners. The minority owners trying to reach into the development potential of the adjoining lots may be intruding into something which it does not own as of right. Having said that, the statutory scheme under LCSRO does not exclude the reaping of the potentiality attributable to adjoining lots. It is because if the Tribunal is minded to grant an order for sale, unless the parties can agree on some other form of sale, the lot in question will be sold in an auction. It will be left to the market to determine whether a higher price than the reserve price can be achieved.

61. … However, under the present LSCRO regime, the reserve price for each lot should continue to be set according to the “on its own” formula, and their aggregate will be adopted as the total reserve price for the auction of all lots in the circumstances. This is supported by the conclusion in Fully in CA.

…

76. ... In the case of LSCRO, the subject of the auction referred to in Schedule 2 paragraph 2 must necessarily, by reasons of the Tribunal’s analysis above, refer to the “… the lot the subject of the order” under section 5(1) which mean the lots comprised in an application under section 3. The said Schedule 2 was only referred to in section 5(1) and is necessarily the latter’s extension expanding on matters relating to auction. The fact that Schedule 2 employs “the lot the subject of the auction” is neither here nor there and, in my view, must be qualified by the lot being subject of the order under s.5(1), and further by s.3(1) or s.3(2) the lot the subject of the application…”.

15.  We agree and shall gratefully adopt the analysis of HHJ Wong in First Kind.

16.  Under section 5(1) of the Ordinance, if an order for sale of all the undivided shares is granted, and the parties cannot agree on other means of sale, the lot in question shall be sold by public auction in accordance with the conditions specified in Schedule 2. Schedule 2 Paragraph 2 of the Ordinance provides:

“The lot the subject of the auction shall be sold subject to a reserve price -

(a) which takes into account the redevelopment potential of the lot on its own (or where 2 or more lots are the subject of the auction, on their own); and

(a) approved by the Tribunal” (Emphasis added)

17.  And the wordings of section 4(1)(b)(i) provide for the Tribunal to make an order for sale concerning “all the undivided shares in the lot the subject of the application”.  So the lot to be sold by auction should be the lot the subject of the application.  The subject of the auction must refer to the subject of the application as well.  Furthermore, Schedule 2 Paragraph 2 is the provision concerning the reserve price which specifically required the Tribunal to consider “the redevelopment potential of the lot on its own or where 2 or more lots are the subject of the auction, on their own”.

18.  From the wordings of these provisions, it is beyond argument that only the subject lot of the application itself should be considered when deciding on the reserve price as well as making an order for sale.  The order for sale can only be made against the lot of land which is subject of the application.  And in setting the reserve price for the auction, the redevelopment potential of the lot on its own and if there are 2 or more lots, the redevelopment potential of the lots on their own should be the basis to be considered by the Tribunal.  The words “on its own” and “on their own” refer to the subject of the application and no more and no less.

19.  The wordings of the existing legislation are plain and without ambiguity and leave no room for the contention that in cases of attached rows of lots, redevelopment value of the other lots not being the subject of the application should also be considered.  If the R2’s approach is being accepted, one is not taking into account the potential of the Subject Lot on its own, but rather with the adjoining lots which are not subject of the application before the Tribunal.

20.  In support of his argument, Mr Cheng refers to IRC v Clay (supra) in which it was held that the open market value of a property could include the higher price that an adjoining property owner was prepared to pay, not only on its own but also reflecting its additional advantage of possible extension from the adjoining property.  Cozens-Hardy MR said at 472 as follows:

“… I can see no ground for excluding from consideration the fact that the property is so situate that to one or more persons it presents greater attractions than to anybody else. The house or the land may immediately adjoin one or more landowners likely to offer more than the property would be worth to anybody else. This is a fact which cannot be disregarded.

…

I adopt the language of Scrutton J.: … An "open market" sale of property "in its then condition" presupposes a knowledge of its situation with all surrounding circumstances. To say that a small farm in the middle of a wealthy landowner's estate is to be valued without reference to the fact that he will probably be willing to pay a large price, but solely with reference to its ordinary agricultural value, seems to me absurd. If the landowner does not at the moment buy, land brokers or speculators will give more than its purely agricultural value with a view to reselling it at a profit to the landowner. It is for the referee, whose competence is not challenged, to arrive at a figure. …”

21.  Mr Cheng further refers to what Swinfen Eady LJ stated in the same judgment at 475 as follows:

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

22.  In addition, Mr Cheng refers to Raja v Vizagapatam (supra) in which Lord Romer gave his observation at 313 as follows:

“For it has been established by numerous authorities that the land is not to be valued merely by reference to the use to which it is being put at the time at which its value has to be determined … but also by reference to the uses to which it is reasonably capable of being put in the future. No authority indeed is required for this proposition. It is a self-evident one. No one can suppose in the case of land which is certain, or even likely, to be used in the immediate or reasonably near future for building purposes, but which at the valuation date is waste land or is being used for agricultural purposes, that the owner, however willing a vendor, will be content to sell the land for its value as waste or agricultural land as the case may be. It is plain that, in ascertaining its value, the possibility of its being used for building purposes would have to be taken into account. It is equally plain, however, that the land must not be valued as though it had already been built upon … it is the possibilities of the land and not its realized possibilities that must be taken into consideration.”

23.  We have no quarrel with these valuation principles but as what the Court of Final Appeal has determined in Director of Lands v Yin Shuen Enterprises Ltd & Another [2003] 2 HKLRD 399, (2003) 6 HKCFAR 1, “the statutory language must be decisive” (at §29) and the basis of the open market value can be qualified or excluded.

24.  Similarly, the Court of Final Appeal in Dragon House Investment Ltd & Another vSecretary for Transport & Another [2005] 4 HKLRD 480, (2005) 8 HKCFAR 668 affirmed that the land resumed was not to be valued under section 12(d) of the Lands Resumption Ordinance at its open market value but at a value subject to another provision, ie section 12(c). As such, in Yin Shuen, it was held that where the land resumed was held under a Government lease, no account may be taken of any element in the open market value which reflects the prospect of a modification of the terms of the lease (at §14).

25.  We consider in the present case, the reserve price to be determined is likewise qualified, not of course by the Lands Resumption Ordinance, but by Schedule 2 Paragraph 2 of the Ordinance when it states the lot the subject of the auction shall be sold taking into account the redevelopment potential of the lot on its own. The phrase “the lot on its own” must be given its purposive meaning.

26.  This is best illustrated by, for instance, Trocette Property (supra), which is also cited by Mr Cheng. In this case, the claimants for compensation sought the marriage value of the two interests in the land: the claimants’ leasehold interest with 11½ years to run and the freehold interest of the landlord, ie the Greater London Council. “The ‘marriage value’ arises because in the normal way it would sensibly be anticipated that the value of the two interests, merged, would be substantially greater than the sum of the values of the two if each had to be treated as continuing to be separate” (at 414). Whereas the value of the claimants’ leasehold interest was £2,000, the claimants contended that planning permission would have been obtained for the demolition of the existing building and for profitable redevelopment for shops with warehousing facilities above. Even then, the freehold owner (or any purchaser from him) could not begin the conversion of the property to the latter profitable use for 11½ years unless he were to obtain the consent of the lessee; and the lessee, or anyone to whom he might sell his leasehold interest, would not undertake such a development so long as his right of occupation of the land was limited to 11½ years. Therefore, the owners of the two interests, the freeholder and leaseholder, or persons having purchased their respective interests, have a common interest to make arrangements with one another to enable the combined interests, with the resultant marriage value, with each of the two taking his appropriate share of the resulting added value. “Either the landlord or the lessee might sell his interest in the open market where potential purchasers could be expected to offer a price for the respective interests which would reflect the value of the opportunity of achieving a ‘marriage’ of the two interests in the land” (at 415).  In this regard, the total of the values of a lease and the freehold reversion on that lease would not necessarily be the same as the value which the freehold would have if there were no lease. The English Tribunal determined the “value of cleared site in possession” or “the freehold value of the site in possession in its existing state” at £80,160 of which £41,126 was ascribed to the landlord and £39,034 to the tenant (at 419).

27.  However, Megaw LJ stated the caveat at 416 that:

“If the assessment of the value for the purpose of compensation is to be on the basis of ignoring a proven or admitted fact which would have affected the price of an actual sale on the open market, the use of such basis must, I think, be justified by reference to some specific provision of the legislation.”

28.  In the present case, the Ordinance is the specific provision of legislation which required the Tribunal not to take into consideration any marriage value with the adjoining lots but only assessed the open market value of the Subject Lot “on its own”. That means, as in the present case, if the claimants’ interest in Trocette Property is restricted by statute or otherwise to “on its own”, its value for use for a limited period of 11½ years would be no more than £2,000; anything higher than this would prevent or eliminate the marriage value which is to be found by deducting from the value of the combined interest the respective values of the two interests on each own (Modern Methods of Valuation by Eric Shapiro, David Mackmin and Gary Sams, Estate Gazette, 11th Edition, 2013, at 121-122).

29.  Similarly, in Mountview Estates (supra), an earlier English Lands Tribunal case also cited by Mr Cheng, the leaseholder holding the leasehold interest for an unexpired term of 22 years at a ground rent was in possession of a cleared site available for development.  It was agreed that no one would have been interested in developing the leasehold site when the unexpired term of the lease was so short.  Neither could the freeholder develop the land to his financial advantage before the 22 years elapsed.  But by marrying their interests, the freeholder would be able to develop the land at once and accounting for the profit on the venture, including expenses in merger, it was determined there was a special value of leasehold interest to freeholder in the sum of £100 (at 731-732).

30.  Once again, if the claimants’ leasehold interest in Mountview Estates was restricted to taking into account redevelopment potential of the lot “on its own”, the value would be nominal instead of £100.

31.  In Trocette Property (supra), Lawton LJ also referred to a situation when realities in the open market can be disregarded, ie when any increase in value which is entirely due to the scheme underlying the acquisition – the Pointe Gourde principle which obtains its modern nomenclature from the Privy Council decision in Pointe Gourde Quarrying and Transport Co Ltd v Sub-Intendent of Crown Lands [1947] AC 565.  In this regard, Ms Ngai refers to Good Faith Properties Ltd v Cibean Development Co Ltd [2014] 5 HKLRD 534 where the Court of Appeal drew analogy of the exercise of a statutory right of the majority owners under the Ordinance which entails a potential exercise of statutory power on the part of the Tribunal to compel a sale with the compulsory acquisition by the government or other public authorities. While in the latter situation, the Pointe Gourde principle applies, we see the logic or rationale of inserting the phrase “on its own” in Schedule 2 Paragraph 2 of the Ordinance. As stated by Rogers VP (as he then was) in Bond Star (supra), the purpose of the Ordinance is to take away the power of the owner of the “last unit” to demand a premium that would stultify a development (at §27).  In such event, the marriage value, if any, that may arise is also derived from the possible development facilitated by the majority owner making the application pursuant to the Ordinance. Therefore, any increase in value which is entirely due to the scheme to be made possible by the Ordinance, save from the proviso in Schedule 2 Paragraph 2, should be excluded. Otherwise, “an unrealistic price for the particular lot” as termed by the Court of Appeal would result in an auction, the majority owner might still be forced to bid up to the full redevelopment value.

32.  In any event, the issue of “marriage value” was also touched upon by the Court of Final Appeal in Capital Well Limited v Bond Star Development Limited[2005] 4 HKLRD 363, (2005) 8 HKCFAR 578:

“34. Once the purpose of s 4(2)(b) is understood, the error in the appellant’s approach becomes apparent. Mr Chain sought to argue that the Tribunal had erred in failing to recognize that a valuation of the minority owner’s interest was obliged to take into account the Lot’s “strategic position” and “marriage value”. He submitted that any valuation which failed to attribute significant value to those features of the Lot over and above its proportionate value was wrong in principle and could not serve as a basis for judging whether the $2.5 million offer was fair and reasonable. As the Tribunal had relied precisely on such deficient valuation evidence, it was wrong as a matter of law. Mr Chain was therefore approaching the s 4(2)(b) exercise as if it required the Tribunal to decide first what the correct valuation was, and only then to assess the fairness and reasonableness of the majority owner’s offer against the valuation carried out on correct principles.”

33.  Nevertheless, Mr Justice Ribeiro PJ responded by giving a short shrift at §35 as follows:

“35. We do not consider that the Tribunal is required to perform any such task. …... The Tribunal does not need to resolve conflicts of this nature since it does not have to decide on the value of the interest for itself.”

34.  Thus, to the extent that the reserve price pursuant to Schedule 2 Paragraph 2 of the Ordinance is so qualified to the redevelopment potential of the lot “on its own”, the other authorities referred to by Mr Cheng on the ambit of open market value are irrelevant.

35.  Having considered the above, we find the suggestion of marriage value by the R2 inconsistent with the requirement under Schedule 2 Paragraph 2 of the Ordinance and the application for adducing supplemental expert report in this regard must be dismissed.

Extension of Time

36.  Mr Cheng confirmed at the hearing that should the leave application concerning marriage value fail, he will only ask for an extension of 14 days to file and serve the rebuttal report.  Ms Ngai also submitted that 14 days is a reasonable extension.  We granted the R2 a 14 days extension to file and serve the rebuttal expert report.

Costs

37.  It is agreed that costs for the extension of time should be to the applicant at the fixed costs of $700 to be paid forthwith.  We so ordered.

38.  As for the costs of the supplemental expert report on marriage value, Ms Ngai for the applicant asked for costs on the basis that such an application is unnecessary and misconceived in view of the clear wordings in the Ordinance and had there be diligent research done, the R2 should have never taken out the Interlocutory Application.

39.  Mr Cheng submitted that the application is not unnecessary or misconceived since the concept of marriage value is a recognized principle in valuation and the applicability of this concept had never been argued or dealt with by any Tribunal or higher courts.  Mr Cheng suggested there should be no order as to costs.

40.  We agree with Mr Cheng that the argument on marriage value as presented by the R2 is a novel point that had not been dealt with by any Tribunal or court.  Applying the compensation approach on costs enunciated in Good Faith (supra), the taking of such an argument by the R2 based on legal advice cannot be said to be obviously unreasonable which justified a costs sanction to deprive the R2 of its costs as well as ordering it to pay the costs of the applicant.  The proper order should be no order as to costs and we had so ordered at the hearing.