Introduction

Land is a very scarce resource in Hong Kong. Apart from developing new sites, developers may choose to redevelop old buildings. In order to facilitate urban renewal, majority owners of a lot of land who satisfy the requirements under the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) (“LCSRO”) can apply to the Lands Tribunal for an order for compulsory sale. Recently, it is reported that more developers are seeking such order for compulsory sale under LCSRO as compared to year 2016.

As stated by Mr Justice Ribeiro PJ in Capital Well Limited v Bond Star Development Limited (2005) 8 HKCFAR 578, one of the objectives of LCSRO is to facilitate urban renewal by assisting private developers whose redevelopment plan is obstructed by some minority owners seeking to extract a wholly unreasonable price or “ransom” for permitting the redevelopment to proceed.  At the same time, LCSRO also provides mechanism to ensure that the minority owners will receive fair and reasonable compensation for their interests in the lot. There are statutory requirements which an applicant has to satisfy the Lands Tribunal before the Lands an order for compulsory sale will be granted.

Application threshold

In order to make an application under LCSRO for an order for compulsory sale, the applicant must own, otherwise than as a mortgagee, not less than 90% of the undivided shares in a lot. With effect from 1 April 2010, the application threshold is reduced from 90% to 80% for the following three classes of lots:

• a lot with each of the units on the lot representing more than 10% of all the undivided shares in the lot;
• 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;
• a lot that is not located within an industrial zone and each of the buildings erected on the lot-
  • is an industrial building; and
  • was issued with an occupation permit at least 30 years before the date of application.

In making an application under LCSRO, the applicant must also submit a valuation report prepared not earlier than 3 months before the date of the application, setting out the assessed market value of each property on the lot on a vacant possession basis, and assessed as if the lot could not be made the subject of an application for an order of sae; and not taking into account the redevelopment potential of the property or the lot.

Statutory requirements

Pursuant to section 4(2) of LCSRO, the Lands Tribunal must not make an order for sale unless it is satisfied that:

• the redevelopment of the lot is justified due to the age or state of repair of the existing building; and
• the applicant has taken reasonable steps to acquire all the undivided shares in the lot including negotiating for the purchase of such of those shares as are owned by the minority owner on terms that are fair and reasonable.

Redevelopment is justified due to the age or state of repair of the existing building

Age and state of repair of the existing building are two separate grounds to justify redevelopment. Although physical conditions of a building can reflect the age of the building to some extent, the Lands Tribunal pointed out in Good Trader Ltd v Hinking Investments Ltd [2007] 3 HKC 219 that there are scenarios that redevelopment is justified where the existing building has been damaged by fire or landslide and it would not be viable to repair it economically or physically.

In order for redevelopment to be justified on the ground of age of the existing building, the Lands Tribunal will consider various factors including, for example, how long the existing building has been built, and whether the existing building has passed its physical and economic life span. Physical life span refers to the degree of deterioration of building materials of the building whereas economic life span relates to whether the deterioration of the building has reached such an extent that the cost of maintenance would outweigh its economic value.  In this connection, the applicant has to adduce expert reports prepared by structural engineers and/or building surveyors to show that the building has so many structural deficiencies that either its physical life or its economic lifespan has come to an end so as to justify redevelopment of the existing building.

In respect of the state of repair of the building, the Lands Tribunal is entitled to look at whether the state of repair of the building would render the building a danger to the residents or the public at large, and whether the cost of repair would exceed the existing value of the building or the enhancement value arising from the repairs. These factors are not exhaustive. As one of the purposes of LCSRO is to facilitate urban renewal in respect of old and dilapidated buildings, the Lands Tribunal in Wellcity Development Ltd v Mak Chun Fu (LDCS 22000/2014) granted an order for sale in respect of a building which was found to be in such a poor state of repair which justified redevelopment even though it was not structurally unsafe with immediate danger of collapse.

Reasonable steps taken

The applicant is required to show that it has taken reasonable steps to acquire all the undivided shares in the lot, which include the reasonableness of the steps taken to communicate to the minority owners of its willingness to purchase their shares and the reasonableness of the terms of the offer. The Court of Final Appeal in the Capital Well case held that, in determining the reasonableness of the terms of the offer, the Lands Tribunal is not required to conclude as to what figure represents the correct valuation or to adjudicate upon any disputes as to the correct valuation principles to be applied; it only needs to be satisfied that the offer falls within what may broadly be regarded as fair and reasonable compensation for the interest in question on the evidence available. Such evidence includes the valuation report submitted by the applicant at the time of application.

Furthermore, the applicant should attempt mediation with the minority owners.  If the applicant unreasonably fails or refuses to attempt mediation, it may not be considered to have taken all reasonable steps to acquire the minority owners’ shares and the Lands Tribunal may refuse to make an order for sale. Besides, in determining whether reasonable steps have been taken by the applicant, the Lands Tribunal is also entitled to take into account any offers made to the minority owners after an application for compulsory sale has been made.

Conclusion

This article sets out the basic requirements which an applicant has to fulfil when it intends to make an application for an order for compulsory sale under the regime of LCSRO.

In view of the fact that the prices of government land sold under the Government Land Sale Program have reached record high levels coupled with keen competition between land developers in the last two years, it is anticipated that, despite it may take time to acquire sufficient units to meet the application threshold, LCSRO will play an increasingly important role in assisting local land developers to acquire land for redevelopment purpose.

For enquiries, please contact our Real Estate Department:

E: realestate@onc.hk

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.