Land and Property Law – Record reserve price set in compulsory sale for redevelopment ordered by the Lands Tribunal
Land and Property Law
In a judgment dated 5 May 2023, the Lands Tribunal made an order for sale under the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) (“the Ordinance”) to sell the lot on which the Wah Ha Factory Building, Quarry Bay stands. The Tribunal set the reserve price for the auction of the lot at $5.125 billion, the highest ever of its kind.
Of note is the Tribunal’s approach to assessing the value of unauthorised building works and encroachments in the Building and the Tribunal’s comments on whether a developer’s “special interest” could be taken into account in assessing the reserve price for the auction of the lot.
|Reference:||China Orchid International Limited & others v Fujitec (HK) Company Limited & others, LDCS 7000/2018,  HKLdT 38|
|Before:||His Honour Judge M Wong, Presiding Officer of the Lands Tribunal, and Mr. Lawrence Pang, Member of the Lands Tribunal|
|Appearance:||Ross Yuen and Emily Ting, instructed by Lo & Lo, acted for the 2nd, 6th, 8th and 9th Respondents (2nd, 6th, 8th and 9th Respondents withdrew their opposition to the application before the day scheduled for oral closing submissions)|
|Date of Decision:||5 May 2023|
Value of unauthorised works
In accordance with Part 1 of Schedule 1 to the Ordinance, the Tribunal assessed the Existing Use Value (“EUV”) of each property on the Lot, which forms the basis for the pro rata apportionment of future sale proceeds to each owner of the lot.
The 2nd Respondent, represented by Ross Yuen and Emily Ting, is the owner of a ground floor unit with a cockloft covering almost the entire unit. It was argued on behalf of R2 in the course of the trial that the cockloft, though erected without submission of building plans, should be given value.
In the judgment, the Tribunal recognised that unauthorised structures attract market value and could be included in the assessment of EUV.
Many of the existing units in the Building had unauthorised building works, unauthorised conversions and/or unauthorised encroachments into common areas, which did not exist in the approved building plans. It was an issue as to whether such unauthorised parts could attract market value which could be included as part of the EUV under the Ordinance.
There has been continuous doubt in compulsory sale proceedings as to whether an unauthorised property could attract market value forming part of EUV¹. The Tribunal reviewed the case law on the value of unauthorised structures and took judicial notice that when shops consisting of such unauthorised structures are sold, they are usually sold on an “as is basis”. The Tribunal recognised that there is a risk-based approach in determining the priority of enforcement action under the Buildings Ordinance against building safety issues.
In light of the fact that there had been no enforcement action by the Buildings Authority against certain unauthorised cocklofts, the Tribunal assigned market value to them.
The Tribunal also recognised that value should be attributed to unauthorised structures or uses which had been acquiesced by the Incorporated Owners or the co-owners of the Building for a long period of time, which could be regarded as implied waiver of the covenants in the Deed of Mutual Covenant.
In sum, the Tribunal was of the view that it would be unfair that a landowner should receive less than the market value for its interest when there is no express restriction against valuing unauthorised structures under the Ordinance.
Factors which could be taken into account in assessing reserve price
In accordance with s.5(1)(a) and paragraph 2, Schedule 2 of the Ordinance, the Tribunal determined the reserve price at the auction on the basis of the Redevelopment Value of the subject lot.
Paragraph 2, Schedule 2 states that the lot should be sold at auction subject to a reserve price “which takes into account the redevelopment potential of the lot on its own”.
One issue in this case was whether the applicants (who were controlled by Swire Properties, a prospective purchaser and the owner of the lot² adjacent to the subject lot), constituted a special purchaser with “special interest”, which should be included as part of the considerations for establishing “the redevelopment potential of the lot on its own”. Having examined the legislative materials and authorities on the matter, the Tribunal came to the view that the Ordinance does not require the Tribunal to take into account any special interest of any special purchaser, and as a matter of assessment of redevelopment value, the market value should be determined on the basis of a hypothetical purchaser and not a particular purchaser.
While the Tribunal did not consider that any “special interest” Swire might have could be included in “the redevelopment potential of the lot on its own”, it should however be noted that the Tribunal accepted that the wording of paragraph 2, Schedule 2 of the Ordinance show that the Tribunal has discretion to consider other matters on top of the redevelopment potential of the subject lot on its own. This ruling opens the door to future arguments that the reserve price may be fixed at a figure which includes considerations on top of the redevelopment value as assessed.
 For example, Sarford Development Limited & others v Super Star Properties Limited & another  HKLdT 8; Kannix Limited & another v Coreluxe Developments Limited & others  HKLdT 9; Joint Hope Limited v Vecent Hong Kong Trading Limited & others  HKLdT 51; Holly Property Holly Property Co Ltd v Acewell Investments Ltd & others  HKLdT 16; Gain Union Ltd v Ng King Yip & another  HKLdT 44.
 The subject of another compulsory sale application, see Lead Harvest Group Limited & others v Cheong Wing Electric Limited & another LDCS 6000/2018,  HKLdT 8 in which the 2nd Respondent was represented by Mr. Denis Chang SC, leading Mr. Ross Yuen and Ms. Emily Ting.
Called to the Bar in 2008, Ross has developed a general civil practice with particular emphasis on land and commercial law.
• Chin Ling Wah by her son and next friend Shum Lui v Shum Chau 3 HKLRD 372 (the Court allowed mentally incapacitated person’s next friend to obtain order for sale under the Partition Ordinance without making prior application under the Mental Health Ordinance)
• Lead Harvest Group Ltd & Ors v Cheong Wing Electric Limited & Ors(LDCS 6000/2018)  HKLdT 8, 7 Feb 2022 (the Tribunal set record breaking reserve price of over HK$5 Billion in compulsory sale application)
• Hung Yip (HK) Engineering Co Ltd v. Kinli Civil Engineering Ltd 1 HKLRD 860 (applicant of injunction to restrain presentation of winding-up petition to demonstrate presentation would be abuse of process which is not the same as demonstrating bona fide defence on substantial grounds)
• Gain Wealth Global Credit & Investment Ltd v Chan Suk Fong 4 HKLRD 831 (calculation of effective rate of interest to determine if maximum permitted under Money Lenders Ordinance had been exceeded and exercise of discretion under s.25(1), (2)(b) of the Ordinance)
• Monat Investment Ltd v. All Person(s) in Occupation of Part of the Remaining Portion of Lot No 591 in Mui Wo D.D. 4 No.16 Ma Po Tsuen, Mui Wo, Lantau Island and Another 4 HKLRD 330,  HKCFI 1970 (whether a squatter’s unlawful actions preclude his adverse possession claim from succeeding).
Visit Ross’ profile for more details.
Before joining Chambers in September 2020, Emily was a Judicial Assistant at the Court of Final Appeal between 2019 and 2020, where she assisted judges in appeals, leave applications and other research and publications.
Emily is developing a broad civil practice and accepts instructions in all areas of Chambers’ work. She is active in the area of land law (including land compulsory sale applications, adverse possession, landlord and tenant disputes and building planning) and has co-authored the articles Summary possession of land under Order 113: Practical tips (with Ross Yuen) and Exemption clauses in the Deed of Mutual Covenant: A built-in shield against liability for building managers? (with Isabel Tam).
Emily also regularly acts as sole advocate in and advises on land, trust and probate matters.
Find out more from Emily’s profile.
This article was first published on 15 May 2023.
Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The photograph which appears in this article is included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related.