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Deacons Legal Update 0410
Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice Introduction 1. The Land (Compulsory Sale for Development) Ordinance (Cap. 545) (the ³Ordinance´) was brought into force on 7 June 1999. Under Section 3(1) of the Ordinance, a person owning not less than 90% of the undivided shares in a lot may make an application to the Lands Tribunal (the ³Tribunal´) for an order to sell all the undivided shares in the lot for the purpose of redevelopment (the ³Compulsory Sale Order´). 2. The purpose of the Ordinance was to facilitate private sector-led redevelopment of old buildings by enabling developers to overcome the common hurdles involving minority owners whose whereabouts are unknown or hold out from selling their units in order to demand a ³ransom price´ from the developer. The new position 3. On 12 January 2010, the Government issued the Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice (the ³Notice´) in the Gazette pursuant to Section 3(5) of the Ordinance, which enables the Chief Executive in Council to specify by notice in the Gazette a lower percentage for the purpose of Section 3(1) of the Ordinance in respect of any specified class of the lot. 4. The effect of the Notice is that, effective 1 April 2010, the compulsory sale application threshold shall be reduced from 90% to 80%. In other words, persons owning not less than 80% of the undivided shares in a lot may, on or after 1 April 2010, apply for a Compulsory Sale Order. This reduced threshold applies to the following 3 classes of lot:(a) a lot with each of the units on the lot representing more than 10% of all the undivided shares in the lot; (b) a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the date of application; and (c) a lot that is not located within an industrial zone under the Town Planning Ordinance and each of the buildings erected on the lot (i) is an industrial building; and (ii) was issued with an occupation permit at least 30 years before the date of application. 5. The Notice also contains provisions permitting certain subdivisions of units to be regarded as one single unit where the subdivision does not involve any alteration to the size of any common area or change in the liability of any person in relation to the common areas and facilities. The Procedures 6. The majority owner of a lot must file the application with the Tribunal, accompanied by a valuation report, which shall be prepared not earlier than 3 months before the date of application and set out the assessed market value of each property on the lot:(a) on a vacant possession basis; (b) assessed as if the lot could not be made the subject of an application for an order for sale; and (c) not taking into account the redevelopment potential of the property or the lot.
7. The majority owner of the lot who has made an application must also:(a) serve a copy of the application on each minority owner of the lot; (b) cause a copy of the application to be registered under the Land Registration Ordinance (Cap. 128) against the lot; and (c) cause a notice as specified in Part 2, Schedule 1 of the Ordinance and in the Chinese and English languages to be affixed upon a conspicuous part of the building(s) on the lot and published in not less than 1 Chinese newspaper and in not less than 1 English language circulating generally in Hong Kong. 8. If any minority owner disputes the value of any property as assessed in the application, the Tribunal must hear and determine the issue. The Tribunal is not required to conduct a valuation but must be satisfied on the available evidence that the offer falls within the range of what may broadly be regarded as fair or reasonable compensation for the interest in question. 9. For minority owners who cannot be located, the majority owner must satisfy the Tribunal that the value of that owner¶s property is (a) not less than fair and reasonable; and (b) not less than fair and reasonable when compared with the value of the majority owner¶s property as assessed in the application. 10. Pursuant to Section 4(2) of the Ordinance, the Tribunal shall only make an order for sale if it is satisfied that the redevelopment of the lot is justified (due to the age or the state of repair of the existing development) and that the majority owner has taken reasonable steps to acquire all the undivided shares in the lot. 11. In relation to the age and state of repair of the existing development, the following tests have been formulated by the Tribunal in Intelligent House Ltd v Chan Tung Shing & Ors, LDCS 11000/2006, 23 June 2008:µ1. On the ground of age, the Tribunal is entitled to look at: (a) Whether the old building has reached the end of its physical life. (b) 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: (a) 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. (b) 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 (i) the costs of repair exceeds the existing use value of the building, or (ii) the costs of repair significantly exceeds the enhancement value arising from or attributable to the repairs. (c) 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 ³age´ and ³state 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.¶ 12. In relation to whether the majority owner has taken reasonable steps to acquire all the undivided shares in the lot, the Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd  4 HKLRD 363 stated at paragraph 33 that:µIn making that assessment 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. It is obviously necessary to recognize that there will often be differences of opinion on that matter. If duly satisfied that the rejected offer was fair and reasonable, the Tribunal may make the order, leaving the value and level of compensation to be determined by the public auction. The auction results may prove that the minority¶s assessment was commercially wise. Or they may show that the majority¶s offer exceeded what was realized at the auction.¶ 13. When assessing whether an offer is reasonable, the Tribunal is not required to conduct a valuation exercise. It merely needs to be satisfied that the offer falls within the range of what may broadly be regarded as fair and reasonable. 14. Upon making the order, the Tribunal shall appoint a trustee (usually the law firm acting for the majority owner) in order to discharge the duties under the Ordinance in relation to the lot. The Order made by the Tribunal shall also authorize the trustee to charge such remuneration for their services as trustee as the Tribunal thinks fit. 15. Pursuant to Section 7(1) of the Ordinance, the trustee shall cause a copy of the order to be registered under the Land Registration Ordinance (Cap. 128) against the lot to which the order relates. 16. Pursuant to Section 5(1) of the Ordinance, the lot to which the order relates shall be sold by public auction; or if the whereabouts of each minority owner of the lot is known, the lot may be sold by other means such as:(a) agreement in writing by each minority owner and majority owner; (b) approved by the Tribunal in its absolute discretion; and (c) in accordance with such conditions, if any, as the Tribunal specifies in directions. 17. An owner whose unit is to be sold pursuant to a Compulsory Sale Order will be entitled to a prorata share of the sale proceeds. Termination of Tenancies 18. Upon making a Compulsory Sale Order, the Tribunal may simultaneously order that compensation be paid to tenants of the units in the building(s) on the lot whose tenancies were entered into before the date of the Compulsory Sale Order and were deemed terminated by the Ordinance as a result of the compulsory sale. 19. Further, the Tribunal may direct that:(a) all such tenancies be deemed to be terminated immediately upon the purchaser becoming the owner of the lot; and (b) the tenants are required to deliver vacant possession upon the expiry of 6 months immediately following the day on which the purchaser became the owner of the lot (Section 8(1)(b) of the Ordinance). 20. The Tribunal may take into account the following in determining the amount of compensation for a tenant:(a) the tenant¶s representations as to whether compensation should be payable and, if so, the amount; and (b) the benefit, if any, afforded to the tenant for not being required to deliver vacant possession until 6 months after the purchaser becomes the owner of the lot. 21. If compensation is specified in the order issued by the Tribunal, then upon the sale of the lot, each ex-owner will be responsible for paying the compensation to their respective ex-tenants. 22. A trustee (if one is appointed by the Tribunal) will deduct the compensation amount specified by the Tribunal from the proceeds of sale of the lot before releasing the residual amount to the owners. Alternatively, the Tribunal may direct that the trustee pays into the Tribunal¶s account the proceeds of sale for the satisfaction of the compensation amount specified by the Tribunal. 23. Currently, the Development Bureau is working with the Judiciary and the Department of Justice on a pilot scheme for a mediation mechanism for furthering the aim of affording better protection for minority property owners.
How Deacons can help 24. Deacons has extensive experience in acting for major developers in property-related matters and project development work and in representing clients before the Tribunal. We would be pleased to answer any queries you may have in relation to the matters discussed in this bulletin or other property-related issues. Contact: Property Dept: email@example.com Litigation Dept: firstname.lastname@example.org, email@example.com, firstname.lastname@example.org www.deacons.com.hk or e-mail: email@example.com
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