Hong Kong: Caution to Majority Owners in Their Compulsory Sale Applications

Last Updated: 14 June 2010
Article by FK Au, Sally M.M. Tsoi and Alan T.S. Yip
Most Read Contributor in Hong Kong, October 2018

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions