Originally published 11 June 2010

Keywords: Hong Kong, compulsory sale applications, Lands Tribunal,

The Court of Appeal expressed its reservation on the correctness of the tests formulated by the Lands Tribunal relating to the meaning of "age" and "state of repair" of the building under the Land (Compulsory Sale for Redevelopment) Ordinance (Cap.545) (the "Ordinance").

In a recent Court of Appeal judgment in Fineway Properties Limited v Sin Ho Yuen Victor, the Administrator of the Estate of Sin Yat CACV 95/2009 (handed down on 28 May 2010), the Court of Appeal held that :

  1. The redevelopment value of a lot ("RDV"), once agreed by the parties, should not be re-opened merely because of lapse of time.
  2. Although it was unnecessary for the Court of Appeal to decide or express a view on the point, the Court expressed certain reservations on the correctness of the tests formulated by the Lands Tribunal (the "Tribunal") in Intelligent House Ltd v Chan Tung Shing & Ors, LDCS 11000/2006 in relation to the meaning of "age" and "state of repair" of the building.

This recent Court of Appeal judgment in Fineway Properties would have some impact on future compulsory sale applications under the Ordinance.

Background

The Applicant applied for an order of compulsory sale of a lot situated at 44-46 Haven Street in Causeway Bay under the Ordinance. The trial commenced in June 2008 and the parties agreed the redevelopment value ("RDV") at HK$122 million shortly after the trial began.

The original trial dates were spent on other valuation issues and the trial only resumed in December 2008. The Applicant then made an application to re-open the fixing of the RDV on two grounds: (1) that the agreement had been made on a false premise and (2) that during the interval of six months, there had been a drastic market drop caused by the financial tsunami.

The Tribunal rejected the 1st ground but accepted the 2nd and allowed the re-opening of the RDV, which resulted in a lower RDV ultimately set at HK$70.5 million. As a result, there was a drastic reduction in the Respondent's share of the proceeds of the auction.

The Respondent contended that the reopening of the RDV should not have been allowed and the original RDV of HK$122 million should be substituted in calculating his proper share of the proceeds.

Court of Appeal's Decision on the Re-Opening of the RDV

The Court of Appeal held that the Tribunal erred in allowing the RDV to be re-opened. The lapse of time was not a valid reason to allow the RDV to be re-opened since the Tribunal was aware of the 6-month adjournment but it did not consider any effect of such adjournment on the RDV as agreed and the parties were not told that such interval would affect the RDV.

However, the Court of Appeal held that there was no available remedy for the Respondent since:

  1. there is nothing in the Ordinance that authorises the court to "deem" the price achieved at the auction to be something other than the price actually achieved;
  2. one cannot assume that the auction would necessarily have been successful had the reserve price been different; and
  3. the trustees for sale cannot be ordered to make a distribution of funds that they do not have. It is hence impossible to treat the auction as having achieved a price of HK$122 million.

The Court of Appeal was of the view that had the Respondent applied for a stay of the order, remedy would have been available.

The "Economic Lifespan Test" Formulated by the Lands Tribunal

Under section 4 of the Ordinance, an applicant must satisfy the Tribunal, among other things, that, due to the "age" or "state of repair" of the existing development on the lot, redevelopment is justified.

In determining whether the "age" or "stage of repair" of the existing development justifies redevelopment, the Tribunal, in at least five past cases, adopted an "economic lifespan test" formulated by the Tribunal in Intelligent House Ltd v Chan Tung Shing & Ors, LDCS 11000/2006:

"1.

On the ground of age, the Tribunal is entitled to look at:

  1. Whether the old building has reached the end of its physical life.
  2. Whether the old building has reached the end of its economic lifespan. The economic lifespan comes to an end when the cleared site value of the lot significantly exceeds the existing use value of the building, provided that it can be demonstrated that the building has so come to the end of the economic lifespan because of its age as reflected by features of obsolescence.

2.

On the ground of state of repair, the Tribunal is entitled to look at:

  1. The state of repair of the old building is such that it has rendered the building a danger to the residents or the public at large.
  2. The state of repair of the old building is such that it has rendered the building coming to the end of its economic lifespan, in that it has become economically unworthy to repair. This includes situation where (a) the costs of repair exceeds the existing use value of the building, or (b) the costs of repair significantly exceeds the enhancement value arising from or attributable to the repairs.
  3. Moreover, for the purpose of determining whether it is economically worthy to do so, the Tribunal is entitled to look at repairs which would render the building to a tenantable condition fit for the enjoyment of its tenants and visitors, which is reasonable in the present day circumstances for the type of building in question.

3.

On the grounds of both the "age" and "state of repair" of the old building, the Tribunal is entitled to look at all of the above factors or tests collectively to see if that justifies redevelopment, even though when each of them is considered alone, it is insufficient to do so."

Court of Appeal's Reservation on the Intelligent House Formulation

In Fineway Properties, the "economic lifespan test" is not the subject matter of the appeal and hence, technically, it was not necessary for the Court of Appeal to decide or express an opinion on the point.

Nevertheless, the Court still expressed certain reservations on the correctness of the tests formulated by the Tribunal in Intelligent House in relation to the meaning of "age" and "state of repair".

Le Pichon JA, giving the leading judgment of the Court of Appeal, said the following:

"35.

.... I have some reservations as to [the] correctness [of the "economic lifespan test"]. Admittedly, this is no more than a preliminary view without the benefit of hearing full argument on the point but it would not be inappropriate to highlight the fact that the concept of "economic lifespan" does not feature in the Ordinance. It is a concept that might have currency with economists. Be that as it may, it found favour with the tribunal in Intelligent House to the extent that the tribunal considered it to be one aspect of the meaning of "age" and "state of repair" for the purposes of section 4(2)(b) of the Ordinance. Whether that interpretation is sustainable in a higher court remains to be seen. As to the meaning of that concept in the context of "age"...... suffice it to say that meaning and scope of the proviso appear to be far from clear.

36.

Another matter that deserves attention is that the expert reports filed on behalf of the applicant in the present case are replete with references to the works of economic theorists/writers opining on property investment and redevelopment but from the perspective of an economist. See, for example, Baum on Property Investment Depreciation and Obsolescence (1991), Balkin & Ors on Urban Land Economics and Public Policy, 5th edition and Grover on Land and Property Development. How these economic theories and concepts are relevant to the proper construction of the Ordinance is not readily apparent.

37.

For my part, until they have the imprimatur of a higher court, the tests formulated in Intelligent House should be approached with a degree of circumspection and should not be applied as if they were part of the Ordinance itself." (Emphasis added)

Lam J, sitting with Le Pichon JA at the Court of Appeal, echoed the latter's reservations on the tests formulated in Intelligent House. The 3rd judge of the Court, Cheung JA, expressed no view on this point.

Implications and Practical Tips

Whenever the minority owner in a compulsory sale application wishes to challenge the Lands Tribunal's decision before the Court of Appeal, considerations should be given to apply for a stay of execution of the Tribunal's order as early as possible, and in any event before the relevant lot is put up for sale in the auction, otherwise no real remedy might be available to the minority owner. However, it has to be borne in mind that the Tribunal may impose conditions on the grant of stay and the minority owner may or may not be able to fulfil the conditions.

Since it was not necessary for the Court of Appeal in Fineway Properties to decide on the meaning of "age" and "state of repair", the Court of Appeal's comments on the Intelligent House formulation is strictly-speaking not binding on the Tribunal in subsequent cases. However:

  1. the comments of the Court of Appeal in Fineway Properties is of persuasive authority and may be followed by the Tribunal in subsequent cases;
  2. even if the formulation of the tests in Intelligent House is followed and continues to be adopted by the Tribunal in subsequent cases, the Tribunal's decision may be challenged on appeal to the Court of Appeal, and ultimately to the Court of Final Appeal.

Unfortunately, Fineway Properties has created a lot of uncertainties in the meaning of "age" and "state of on the economic lifespan tests formulated in Intelligent House.

For the time being, until the point is considered and determined by the Court of Appeal and, ultimately the Court of Final Appeal, the uncertainty will remain.

  1. Minority owners will be put in a better bargaining position, and the proceedings for these cases may be considerably lengthened, especially if the matter is taken to appeal.
  2. Much more reliance may need to be placed on the evidence of the physical (and not only economic) age and state of repair of the existing development, in order to demonstrate that redevelopment is justified.

Learn more about our Hong Kong office, Litigation & Dispute Resolution and Real Estate practices.

Visit us at www.mayerbrownjsm.com

Copyright 2010. JSM, Mayer Brown International LLP and/or Mayer Brown LLP. All rights reserved. Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: JSM, a Hong Kong partnership, and its associated entities in Asia; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and Mayer Brown LLP, a limited liability partnership established in the United States. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.